Why Leonardo DRS Stock Dropped Today
Key Points
Defense contractor Leonardo edged out earnings forecasts in Q3 and beat easily on sales.
Leonardo also raised guidance through the end of this year.
Priced near 40x earnings, Leonardo stock looks far from cheap.
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Leonardo DRS (NASDAQ: DRS) stock sank 4.9% through 11:10 a.m. ET Wednesday despite beating earnings forecasts this morning.
Heading into the Q3 report, analysts forecast the defense contractor would earn $0.28 per share, adjusted for one-time items, on sales of less than $925 million. Leonardo actually earned $0.29 per share, and sales were $960 million.
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Leonardo DRS Q3 earnings
The defense business is booming all around the world, with CEO Bill Lynn saying "broad-based customer demand was evident in our exceptional bookings and organic revenue growth." Leonardo's sales climbed 18% year over year in Q3, and the boom looks set to continue, with Leonardo noting it booked $1.3 billion in new orders to replace existing orders fulfilled and shipped -- a 1.4 book-to-bill ratio foreshadowing further sales growth ahead.
Turning to profits, earnings as calculated according to generally accepted accounting principles (GAAP) weren't quite as great as the $0.29 per share non-GAAP number noted above. Still, Leonardo grew profits 24% year over year, to $0.26 per share GAAP.
Even better, Leonardo generated $77 million in positive free cash flow in the quarter -- even more cash profit than it reported as net income.
Is Leonardo stock a buy?
Rounding out the good news, Leonardo raised the floor on its revenue forecast, predicting full-year 2025 sales will be at least $3.5 billion and potentially as much as $3.6 billion. Profits guidance also moved higher, with Leonardo predicting non-GAAP earnings between $1.07 and $1.12 per share.
Still, that works out to, at best, a P/E ratio of 34 on this $38 stock -- which seems kind of expensive, even with stellar 24% earnings growth. Despite the good quarter, I can't quite bring myself to recommend buying Leonardo stock at this price.
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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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