Over the past six months, Leonardo DRS has been a great trade, beating the S&P 500 by 19.1%. Its stock price has climbed to $42.96, representing a healthy 25.9% increase. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is now the time to buy Leonardo DRS, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Is Leonardo DRS Not Exciting?
We’re happy investors have made money, but we don’t have much confidence in Leonardo DRS. Here are three reasons we avoid DRS, plus one stock we’d rather own.
1. Long-Term Revenue Growth Disappoints
Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Unfortunately, Leonardo DRS’s 5.1% annualized revenue growth over the last five years was tepid. This fell short of our benchmark for the industrials sector.
2. Backlog Declines as Orders Drop
In addition to reported revenue, backlog is a useful data point for analyzing Defense Contractors companies. This metric shows the value of outstanding orders that have not yet been executed or delivered, giving visibility into Leonardo DRS’s future revenue streams.
Leonardo DRS’s backlog came in at $4.7 billion in the latest quarter, and it averaged 1.1% year-on-year declines over the last two years. This performance was underwhelming and shows the company is not winning new orders. It also suggests there may be increasing competition or market saturation. 
3. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
On average, Leonardo DRS’s ROIC decreased by 4.8 percentage points annually each year over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
Leonardo DRS isn’t a terrible business, but it isn’t one of our picks. With its shares topping the market in recent months, the stock trades at 34.2× forward P/E (or $42.96 per share). Investors with a higher risk tolerance might like the company, but we don’t really see a big opportunity at the moment. We’re fairly confident there are better stocks to buy right now. We’d recommend looking at a dominant aerospace business that has perfected its M&A strategy.
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