Leonardo DRS (DRS)

Aerospace and defense company Leonardo DRS (NASDAQ:DRS) reported revenue ahead of Wall Streets expectations in Q3 CY2025, with sales up 18.2% year on year to $960 million. The company expects the full year’s revenue to be around $3.58 billion, close to analysts’ estimates. Its non-GAAP profit of $0.29 per share was 3.8% 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. Over the last five years, Leonardo DRS grew its sales at a tepid 5.8% compounded annual growth rate. 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 14.5% over the last two years is above its five-year trend, suggesting its demand recently accelerated.

Leonardo DRS also reports its backlog, or the value of its outstanding orders that have not yet been executed or delivered. Leonardo DRS’s backlog reached $8.91 billion in the latest quarter and averaged 44.8% year-on-year growth over the last two years. Because this number is better than its revenue growth, we can see the company accumulated more orders than it could fulfill and deferred revenue to the future. This could imply elevated demand for Leonardo DRS’s products and services but raises concerns about capacity constraints.

This quarter, Leonardo DRS reported year-on-year revenue growth of 18.2%, and its $960 million of revenue exceeded Wall Street’s estimates by 3.9%.

Looking ahead, sell-side analysts expect revenue to grow 4% over the next 12 months, a deceleration versus the last two years. This projection doesn't excite us and suggests 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 10.8%.

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 9.7%, 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%, subpar for an industrials business.

Leonardo DRS’s free cash flow clocked in at $77 million in Q3, equivalent to a 8% margin. This result was good as its margin was 2.2 percentage points higher than in the same quarter last year. Its cash profitability was also above its five-year level, and we hope the company can build on this trend.

Leonardo DRS reported $309 million of cash and $350 million of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $443 million of EBITDA over the last 12 months, we view Leonardo DRS’s 0.1× net-debt-to-EBITDA ratio as safe. We also see its $11 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We were impressed by how significantly Leonardo DRS blew past analysts’ revenue expectations this quarter. We were also glad its EPS outperformed Wall Street’s estimates. On the other hand, its full-year EBITDA guidance slightly missed. Overall, this print had some key positives. The stock traded up 1.5% to $40.79 immediately following the results.

Updated: December 4, 2025 at 10:48 PM EST

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Leonardo DRS.

We think Leonardo DRS is a solid business. Although its revenue growth was uninspiring over the last five years and analysts expect growth to slow over the next 12 months, its backlog growth has been marvelous. And while its diminishing returns show management's recent bets still have yet to bear fruit, its astounding EPS growth over the last two years shows its profits are trickling down to shareholders.

Leonardo DRS’s P/E ratio based on the next 12 months is 28.5x. This valuation tells us that a lot of optimism is priced in. This is a good one to add to your watchlist - there are better opportunities elsewhere at the moment.

Wall Street analysts have a consensus one-year price target of $47.30 on the company (compared to the current share price of $34.44).