Aerospace and defense company Leonardo DRS (NASDAQ:DRS) reported Q4 CY2024 results topping the market’s revenue expectations, with sales up 5.9% year on year to $981 million. The company’s full-year revenue guidance of $3.48 billion at the midpoint came in 1.6% above analysts’ estimates. Its non-GAAP profit of $0.38 per share was 7.6% above analysts’ consensus estimates.
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Leonardo DRS (DRS) Q4 CY2024 Highlights:
- Revenue: $981 million vs analyst estimates of $935.3 million (5.9% year-on-year growth, 4.9% beat)
- Adjusted EPS: $0.38 vs analyst estimates of $0.35 (7.6% beat)
- Adjusted EBITDA: $148 million vs analyst estimates of $143.3 million (15.1% margin, 3.2% beat)
- Management’s revenue guidance for the upcoming financial year 2025 is $3.48 billion at the midpoint, beating analyst estimates by 1.6% and implying 7.5% growth (vs 15.6% in FY2024)
- Adjusted EPS guidance for the upcoming financial year 2025 is $1.05 at the midpoint, missing analyst estimates by 0.8%
- EBITDA guidance for the upcoming financial year 2025 is $445 million at the midpoint, below analyst estimates of $450.5 million
- Operating Margin: 12.2%, in line with the same quarter last year
- Free Cash Flow Margin: 45.2%, down from 53.3% in the same quarter last year
- Backlog: $8.51 billion at quarter end, up 9.8% year on year
- Market Capitalization: $7.81 billion
“Our 2024 financial results exceeded our expectations. DRS delivered record bookings, mid-teens organic revenue growth, healthy adjusted EBITDA margin expansion and solid free cash flow generation. The DRS team’s focus on our customers and helping address their most challenging missions continues to generate remarkable outcomes for our shareholders. Our outstanding people, our agility and innovation combined with our differentiated technologies are foundational to both our growth and market leadership. We remain strategically focused on capitalizing on our momentum to drive continued growth,” said Bill Lynn, Chairman and CEO of Leonardo DRS.
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
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.
Sales Growth
A company’s long-term performance is an indicator of its overall quality. While any business can experience short-term success, top-performing ones enjoy sustained growth for years. Unfortunately, Leonardo DRS’s 3.9% annualized revenue growth over the last four years was sluggish. This was below our standard for the industrials sector and is a poor baseline for our analysis.
We at StockStory place the most emphasis on long-term growth, but within industrials, a stretched 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 9.6% over the last two years is above its four-year trend, suggesting its demand recently accelerated. 
We can better understand 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 $8.51 billion in the latest quarter and averaged 58.5% 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 5.9%, and its $981 million of revenue exceeded Wall Street’s estimates by 4.9%.
Looking ahead, sell-side analysts expect revenue to grow 5.7% 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 see some demand headwinds.
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Operating Margin
Operating margin is one of the best measures of profitability because it tells us how much money a company takes home after procuring and manufacturing its products, marketing and selling those products, and most importantly, keeping them relevant through research and development.
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 10.5%.
Analyzing the trend in its profitability, Leonardo DRS’s operating margin rose by 2.3 percentage points over the last five years, showing its efficiency has improved.
In Q4, Leonardo DRS generated an operating profit margin of 12.2%, in line with the same quarter last year. This indicates the company’s overall cost structure has been relatively stable.
Earnings Per Share
We track the change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.
Leonardo DRS’s EPS grew at an unimpressive 6.7% compounded annual growth rate over the last two years, lower than its 9.6% annualized revenue growth. However, its operating margin actually expanded during this time, telling us that non-fundamental factors such as interest and taxes affected its ultimate earnings.
We can take a deeper look into Leonardo DRS’s earnings to better understand the drivers of its performance. A two-year view shows Leonardo DRS has diluted its shareholders, growing its share count by 15.7%. This dilution overshadowed its increased operating efficiency and has led to lower per share earnings. Taxes and interest expenses can also affect EPS but don’t tell us as much about a company’s fundamentals. 
In Q4, Leonardo DRS reported EPS at $0.38, up from $0.31 in the same quarter last year. This print beat analysts’ estimates by 7.6%. Over the next 12 months, Wall Street expects Leonardo DRS’s full-year EPS of $0.94 to grow 13.8%.
Key Takeaways from Leonardo DRS’s Q4 Results
We were impressed by how significantly Leonardo DRS blew past analysts’ revenue expectations this quarter. We were also glad its full-year revenue guidance was higher than Wall Street’s estimates. On the other hand, its full-year EBITDA guidance slightly missed. Overall, we think this was a solid quarter with some key areas of upside. The stock traded up 3.7% to $30.60 immediately following the results.
Leonardo DRS may have had a good quarter, but does that mean you should invest right now? When making that decision, it’s important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it’s free.
