DRS Technologies: Capitalizing on the Need for Defense

Methods used to track military activity are complex, but DRS Technologies (formerly Diagnostic/Retrieval Systems) (DRS) makes the tasks manageable with electronic systems that process, display, and store complex military and aerospace data. Its primary offerings include surveillance and radar systems, ruggedized computers, weapons targeting systems, flight recorders, communications systems, thermal imaging systems, air combat training systems, and video recorders for defense and aerospace applications. DRS, which has acquired and integrated Integrated Defense Technologies -- and has acquired Engineered Support Systems -- relies on US government agencies (primarily the DoD) for more than 80% of sales.

Keep in mind that these contracts with the Defense Department are mostly for surveillance, not combat. The ongoing need for national defense and border security along with the armed forces constant need to upgrade equipment suggests that demand for DRS products will continue, regardless of troop engagements.

Company backlog is strong. In the last quarter of 2006, DRS picked up $1.1 billion of new contracts, a quarterly record. That brought the backlog to $3.14 billion, also a new record. The strongest interest is in the ground-based and airborne thermal imaging systems, uncooled infrared technology-based sighting and targeting products; battlefield digitization systems, and ship control, power and propulsion systems.

Another possible contract: DRS has been chosen as a finalist to provide preliminary design options for displays and display consoles for what is considered the standard for displays for the U.S. naval combat systems. Its most recent contract was last week for $10 million to repair Knight Precision Targeting systems installed on U.S. Army HMMWVs.

Over the last 5 years, revenues have been averaging about a 3.5% gain per year. Profits have been growing at a rate, on average, of 23% a year. In the next 5 years look for sales to grow by 12% a year, on average, and profits to increase by 15% a year, on average. Actual sales have gone from $1.31 billion in 2004 to a current run rate of $2.75 billion for this year, $3.0 billion next year, and $3.3 billion the next. Earnings per share have grown from $2.09 in 2004, to $2.67 in 2005, $3.05 for 2006 (fiscal year ends March 31). Analysts are looking for $3.40 this year, and $3.90 next year.

One of the valuation metrics that makes this stock look attractive is its relatively low P/E (price to earnings ratio). It's about 16. This is a stock that has carried a P/E between 13 and 20 over the last 7 years. It's now trading near the low end of that range. Other numbers: Return on equity is 9%, up from 6% last year. There is a small dividend of 12 cents a year. The net profit margin is 4.6%. Debt is 56% of capital. Market cap (stock price times number of shares) is $2.1 billion.

DRS has a lot of good going for it. Backlog is high. The stock rallied between 2003 and 2005, then leveled off. It seems to be moving ahead again. Within the last 52 weeks it hit an all-time high of $59.50. With earnings expected to grow at a 15% rate and a p/e of a little higher (16), some investors would say this is fully valued. On the other hand, if more contracts are signed and the rate of growth for revenues and profits is better than expected, this stock could be ready for higher ground. Only time will tell.

DRS 1-yr chart

Disclosure: none