Leonardo DRS (DRS)

Aerospace and defense company Leonardo DRS (NASDAQ:DRS) announced better-than-expected revenue in Q4 CY2025, with sales up 8.1% year on year to $1.06 billion. The company’s full-year revenue guidance of $3.9 billion at the midpoint came in 2% above analysts’ estimates. Its non-GAAP profit of $0.42 per share was 13.2% above analysts’ consensus estimates.

Company Overview

Developing submarine detection systems for the U.S. Navy, Leonardo DRS (NASDAQ:DRS) is a provider of defense systems, electronics, and military support services.

Defense contractors typically require technical expertise and government clearance. Companies in this sector can also enjoy long-term contracts with government bodies, leading to more predictable revenues. Combined, these factors create high barriers to entry and can lead to limited competition. Lately, geopolitical tensions–whether it be Russia’s invasion of Ukraine or China’s aggression towards Taiwan–highlight the need for defense spending. On the other hand, demand for these products can ebb and flow with defense budgets and even who is president, as different administrations can have vastly different ideas of how to allocate federal funds.

Leonardo DRS’s competitors include Raytheon (NYSE:RTX), Lockheed Martin (NYSE:LMT), and Northrop Grumman (NYSE:NOC).

A company’s long-term sales performance can indicate its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Regrettably, Leonardo DRS’s sales grew at a tepid 5.6% compounded annual growth rate over the last five years. This wasn’t a great result compared to the rest of the industrials sector, but there are still things to like about Leonardo DRS.

We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Leonardo DRS’s annualized revenue growth of 13.6% over the last two years is above its five-year trend, suggesting its demand recently accelerated.

We can dig further into the company’s revenue dynamics by analyzing its backlog, or the value of its outstanding orders that have not yet been executed or delivered. Leonardo DRS’s backlog reached $8.73 billion in the latest quarter and averaged 7.8% year-on-year growth over the last two years. Because this number is lower than its revenue growth, we can see the company fulfilled orders at a faster rate than it added new orders to the backlog. This implies Leonardo DRS was operating efficiently but raises questions about the health of its sales pipeline.

This quarter, Leonardo DRS reported year-on-year revenue growth of 8.1%, and its $1.06 billion of revenue exceeded Wall Street’s estimates by 7%.

Looking ahead, sell-side analysts expect revenue to grow 5.3% over the next 12 months, a deceleration versus the last two years. This projection doesn't excite us and implies its products and services will face some demand challenges. At least the company is tracking well in other measures of financial health.

Leonardo DRS has managed its cost base well over the last five years. It demonstrated solid profitability for an industrials business, producing an average operating margin of 10.9%.

Looking at the trend in its profitability, Leonardo DRS’s operating margin rose by 1.3 percentage points over the last five years, as its sales growth gave it operating leverage.

This quarter, Leonardo DRS generated an operating margin profit margin of 11.9%, in line with the same quarter last year. This indicates the company’s overall cost structure has been relatively stable.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Leonardo DRS has shown mediocre cash profitability over the last five years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 5.2%, subpar for an industrials business.

Leonardo DRS’s free cash flow clocked in at $376 million in Q4, equivalent to a 35.5% margin. The company’s cash profitability regressed as it was 6.7 percentage points lower than in the same quarter last year, but it’s still above its five-year average. We wouldn’t put too much weight on this quarter’s decline because investment needs can be seasonal, causing short-term swings. Long-term trends carry greater meaning.

Companies with more cash than debt have lower bankruptcy risk.

Leonardo DRS is a profitable, well-capitalized company with $647 million of cash and $347 million of debt on its balance sheet. This $300 million net cash position is 3% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

We were impressed by how significantly Leonardo DRS blew past analysts’ revenue expectations this quarter. We were also glad its EBITDA outperformed Wall Street’s estimates. Zooming out, we think this was a good print with some key areas of upside. The stock traded up 3% to $39.30 immediately following the results.

Updated: February 24, 2026 at 7:39 AM EST

Are you wondering whether to buy Leonardo DRS or pass? We urge investors to not only consider the latest earnings results but also longer-term business quality and valuation as well.

Leonardo DRS is a fine business. Although its revenue growth was uninspiring over the last five years, its astounding EPS growth over the last two years shows its profits are trickling down to shareholders. We advise investors to be cautious with this one, however, as its diminishing returns show management's prior bets haven't worked out.

Leonardo DRS’s P/E ratio based on the next 12 months is 30.7x. This valuation tells us that a lot of optimism is priced in. Add this one to your watchlist and come back to it later.

Wall Street analysts have a consensus one-year price target of $48.10 on the company (compared to the current share price of $39.30).