Leonardo DRS (DRS)

Leonardo DRS (DRS)

The first ‘Perfect 10’ stock we’re looking at is Leonardo DRS, a company with a 50-year history of success in the defense industry. Leonardo has important contracts with US Army, with a recent $579 million contract win to provide advanced thermal weapon sights and another contract for $39.5 million to provide forward-looking infrared sighting systems, and with the US Navy, for which it is providing propulsion equipment for the new Columbia-class submarines.

Other ongoing projects include the Navy’s 76-millimeter shipboard gun, air combat training systems for the Air Force, and target acquisition equipment for the Army’s Apache helicopters.

Leonardo DRS is a subsidiary of an Italian firm, Leonardo S.p.A., which acquired the military contractor DRS in 2008. Last year, the company entered into an all-stock merger agreement with RADA Electronic Industries, another defense contractor firm, under which the two companies formed a combined entity to trade as DRS on the NASDAQ exchange.

The merger was closed this past November, with RADA shareholders owning 19.5% of the combined company and Leonardo’s parent company owning the remaining 80.5%.

The combined firm will report its first quarterly results in the next few weeks. We should note that for 2021, the last full year before the merger, Leonardo DRS and RADA had combined full-year revenues of $2.7 billion.

On this defense contractor’s Smart Score, most of the factors are positive. Hedge fund holdings increased modestly, and the bloggers were 100% positive on the stock. The technical factors show a 39% positive momentum for the 12-month period, and the trailing 12-month return on equity, a fundamental factor, is nearly 26%. It adds up to a Perfect 10 for the stock.

This stock has caught the attention of Baird analyst Peter Arment, who writes of it, “Investors are likely taking a ‘wait-and-see’ approach over the next few quarters to assess the business model, organic growth outlook, as well as margin expansion and FCF prospects…. DRS is trading at a deep discount relative to peers on both an EV/EBITDA and FCF yield basis.

We believe the discount should narrow over time, assuming DRS is able to execute on key programs and management effectively allocate capital towards niche M&A. The lack of institutional investor base should be resolved if the Italian parent company, Leonardo S.p.A decides to partially monetize their ownership stake which will allow the public free float and liquidity to improve.”

Arment  gives DRS shares an Outperform rating, with a $19 price target implying a 41% upside on the one-year horizon.

With 3 recent positive analyst reviews on file, DRS shares have a unanimous Strong Buy consensus rating. The stock is trading for $13.48 and has an average price target of $15.24, a combination that gives a 13% potential upside from current levels.