What a fantastic six months it’s been for Leonardo DRS. Shares of the company have skyrocketed 44.9%, setting a new 52-week high of $46.91. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is it too late to buy DRS? Find out in our full research report, it’s free.
Why Does Leonardo DRS Spark Debate?
Developing submarine detection systems for the U.S. Navy, Leonardo DRS (NASDAQ: DRS) is a provider of defense systems, electronics, and military support services.
Two Things to Like:
1. Surging Backlog Locks In Future Sales
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 punched in at $8.61 billion in the latest quarter, and over the last two years, its year-on-year growth averaged 54.4%. This performance was fantastic and shows the company has a robust sales pipeline because it is accumulating more orders than it can fulfill. Its growth also suggests that customers are committing to Leonardo DRS for the long term, enhancing the business’s predictability. 
2. Outstanding Long-Term EPS Growth
Analyzing the change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.
Leonardo DRS’s full-year EPS grew at an astounding 17.5% compounded annual growth rate over the last two years, better than the broader industrials sector.
One Reason to be Careful:
New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Leonardo DRS’s ROIC has unfortunately decreased. Only time will tell if its new bets can bear fruit and potentially reverse the trend.
Final Judgment
Leonardo DRS’s merits more than compensate for its flaws, and with the recent rally, the stock trades at 42.7× forward P/E (or $46.91 per share). Is now the right time to buy? See for yourself in our full research report, it’s free.
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