$7.78
$20.81
bear $7.78
base $17.59
bull $20.81
margin of safety $11.50
market price* $35.42
Leonardo DRS designs and builds defense electronics and naval power systems, reported in two segments: Advanced Sensing and Computing, and Integrated Mission Systems. Its anchor franchise is the electric power and propulsion system for the U.S. Navy's Columbia Class ballistic missile submarine. The U.S. government supplied 80% of 2025 revenue (Navy 36%, Army 36%), about 88% of revenue came from fixed-price contracts, and no single contract exceeded 10% of revenue. A significant portion of revenue and cash flow arrives in the fourth quarter. The company took its current shape on November 28, 2022, when it completed an all-stock merger with RADA Electronic Industries, a maker of software-defined tactical radars, in the same year it sold its GES and AAC businesses. Leonardo S.p.A. indirectly controls a significant share of the stock under a Proxy Agreement and received $68 million of the $96 million of dividends paid in 2025. Earnings power. We measure owner earnings as operating cash flow with working-capital swings removed, minus stock compensation and the capital spending needed to keep the business running; because we value the business before its lenders, we then add back cash interest paid. On that basis the business produced about $175 million in 2023, $278 million in 2024 and $281 million in 2025. We anchor on $278 million, the median of those three post-merger years (about $1.03 per share). Earlier years describe a different company, and 2022 was further depressed by $79 million of taxes on the GES and AAC sales and $29 million of deal costs. In 2025 customer advances lifted operating cash flow by $186 million; we removed that as a timing effect rather than earnings. Pension contributions are kept as a real cost. Amortization of acquired intangibles (about $22 million a year) is added back as a sunk cost; it is small against cash flow, and decay in the franchise is carried in the bear case. Capital spending rose to $139 million in 2025, partly for capacity such as a new naval power facility in South Carolina; our method treats only about $10 million of that as growth spending, so 2025 earnings power is, if anything, slightly understated. Near-term growth. Owner earnings grew 3.6% in 2025 (1.1% before interest). Our base case starts year one 6% above the anchor, faster than that trailing rate, because the mid-2026 quarterly filing shows first-half revenue up 8% ($1,759 million vs $1,628 million) and net earnings up from $104 million to $148 million, and the company reported funded backlog of $5,092 million at June 30, 2026, up 17% from a year earlier. Total backlog was $8,448 million at the end of 2025, about 2.3 years of revenue. Base case. Growth of 6%, 5% and 4% over the next three years while contracted backlog converts to revenue, then 2% a year through year ten, well below the roughly 5% a year revenue growth recorded from 2019 to 2025 (a period that included the RADA merger and the GES and AAC sales). That modest rate reflects the company's incumbent positions on programs already in production, such as Columbia Class. From year eleven cash flow is held flat, with no growth, through year thirty, then faded to zero over ten years because we cannot evidence specific programs that far out. No margin expansion or new-program wins are credited. The business is worth about $5.06 billion ($18.81 per share). Bear case. Total backlog grew only 2.2% in 2025 while revenue grew 13%, and the company disclosed fewer new awards in tactical computing and dismounted soldier sensing. With 88% of revenue on fixed-price contracts, cost overruns fall on DRS. The bear case holds cash flow flat at $278 million for three years, then slides to $175 million, the weakest post-merger year actually recorded (2023), by year five, holds it there through year twenty and fades it to zero by year twenty-five. The business is worth about $2.42 billion ($9.00 per share). Bull case. Growth continues at the first-half 2026 pace, 8% for two years and 6% in year three, as the larger funded backlog and the new South Carolina naval power capacity deliver, then 4% a year through year ten, still below the 2019 to 2025 record; flat to year thirty and faded over the following ten years. The business is worth about $5.92 billion ($22.03 per share). What it owes. At June 30, 2026 DRS held $270 million of cash, a seasonal low point, against $149 million of debt; at the end of 2025 its debt consisted of about $106 million of finance leases and $46 million for a financing arrangement on its Menomonee Falls, Wisconsin plant. It repaid its $191 million term loan in January 2026 and replaced its credit agreement with a $500 million revolving facility expiring in January 2031. In July 2026 it agreed to purchase Raft, a mission-software, data fusion and AI company, for $450 million in cash, expected to close in the fourth quarter of 2026 subject to regulatory approvals and funded with cash and revolver borrowings. We treat that $450 million as already owed. Raft's earnings are not disclosed, so we give them no value in any case; if Raft performs, its results will show up in future owner earnings and raise our estimate. Net of cash, the company effectively owes about $329 million ($1.22 per share). Interest is a small fraction of cash flow in every case, and no maturity or covenant materially affects the outcome. What the shares appear to be worth.
Bear: $2.42 billion business less $0.33 billion owed leaves $2.09 billion, or $7.78 per share.
Base: $5.06 billion less $0.33 billion leaves $4.73 billion, or $17.59 per share.
Bull: $5.92 billion less $0.33 billion leaves $5.60 billion, or $20.81 per share. All cash flows are discounted at 6%. Margin-of-safety price. The margin-of-safety price is $11.50, about 35% below the base case. DRS has a long backlog and incumbent positions, but its dependence on U.S. defense budgets, its heavy fixed-price exposure, and a sizable pending acquisition whose earnings we cannot see call for a wider margin of safety than a highly predictable business. This estimate would be too low if Raft adds meaningful earnings or the new naval power capacity sustains growth well above our base case; it would be too high if fixed-price programs incur charges or the slower backlog growth seen in 2025 persists.