Leonardo DRS revenue growth outpaces backlog decline

Leonardo DRS (NASDAQ:DRS) shares have fallen 19.4% over the past six months, lagging the S&P 500's 7.7% gain in the same period. The defense contractor, which develops submarine detection systems for the U.S. Navy, currently trades at $35.67 per share.

StockStory analysts highlight a divergence between the company's recent revenue acceleration and its contracting order book. Leonardo DRS reported annualized revenue growth of 10.9% over the last two years, a pace that exceeds its five-year trend. This uptick suggests recent demand acceleration within the industrials sector, where long-term growth metrics can sometimes miss shorter industry cycles or specific catalysts like new contract wins.

The company's financial efficiency has also improved. Leonardo DRS's margin expanded by 5.4 percentage points over the last five years. The firm's free cash flow margin for the trailing 12 months reached 9.6%, rising faster than its operating profitability. This shift indicates the business has become less capital-intensive, a factor StockStory identifies as critical because cash flow, rather than accounting profits, determines a company's ability to meet its financial obligations.

However, the outlook for future revenue faces headwinds from the company's backlog. Leonardo DRS's backlog stood at $5.09 billion in the latest quarter. Over the last two years, this figure has declined at an average rate of 6.8% year-on-year. StockStory characterizes this performance as underwhelming, suggesting the company is not securing new orders at a pace that offsets existing deliveries. The analysis posits that this trend may point to increasing competition or market saturation within the defense contracting space.

Despite the shrinking backlog, StockStory concludes that Leonardo DRS's positive characteristics outweigh the negatives. The report frames the current valuation as a potential entry point for investors weighing the improved cash flow generation against the uncertainty in future order volume.