Leonardo DRS: Navigating Supply Chain Challenges to Capitalize on a $1.2 Trillion Global Defense Boom

The global defense industry is undergoing a seismic shift. With the U.S. passing the $150 billion One Big Beautiful Bill Act in 2025 and NATO nations collectively pledging to increase defense spending to 5% of GDP, the sector is primed for a multi-decade boom. Against this backdrop, Leonardo DRS (DRS) has emerged as a standout performer, leveraging its dual-core expertise in Advanced Sensing and Computing (ASC) and Integrated Mission Systems (IMS) to secure a prime position in this expanding market.

Q2 2025: A Blueprint for Resilient Growth

Leonardo DRS's Q2 2025 results underscore its operational strength. Revenue rose 10% year-over-year to $829 million, driven by robust demand for electric propulsion systems, infrared sensors, and ground network computing. Net earnings surged 42% to $54 million, while adjusted EBITDA hit $96 million—a 17% increase—with margins expanding to 11.6%. The company raised its full-year revenue guidance to $3.525–$3.6 billion (up from $3.425–$3.525 billion) and lifted adjusted EPS expectations to $1.06–$1.11.

Equally compelling is the $8.6 billion backlog, up 9% year-over-year, with funded backlog growing at a double-digit pace. This reflects the durability of DRS's long-term contracts, including its pivotal role in the U.S. Navy's Columbia Class submarine program, which extends into the mid-2030s.

Strategic Positioning: Aligning with Macro Tailwinds

Leonardo DRS's business model is a textbook example of defensive growth. Its ASC segment, which generates 65% of revenue, is deeply embedded in U.S. and NATO defense priorities. The company's infrared sensing technology is critical for applications ranging from missile guidance to counter-UAS (unmanned aerial systems) defense, areas now deemed strategic by the U.S. Department of Defense. The Golden Dome initiative, a layered air and missile defense system, and the One Big Beautiful Bill Act's $113 billion FY2026 funding allocation directly benefit DRS's capabilities.

Internationally, NATO's shift to a 5% GDP defense spending target has unlocked new markets. Leonardo DRS's short-range air defense systems and mobile power generation units are seeing heightened demand in Europe and the Middle East, driven by geopolitical tensions and the proliferation of drone threats.

Near-Term Risks: Germanium Shortages and R&D Costs

Despite these headwinds, DRS is not without challenges. The most pressing is the global germanium shortage, a critical material for infrared sensors. Export restrictions and delayed mining capacity expansions have pushed up costs and forced DRS to dip into safety stock. While the company is exploring alternatives—such as recycling and component redesign—management has warned that meaningful relief is unlikely until 2026. This has already pressured ASC's adjusted EBITDA margins, which fell 50 basis points in Q2 due to elevated R&D and material costs.

However, DRS's proactive approach to innovation is a silver lining. Internal R&D (IRAD) spending now accounts for 3.5% of revenue, up from 2.8% in 2024. This investment is accelerating the development of “ReadyNow” solutions—mature, deployable technologies in counter-UAS, space-based missile tracking, and electronic warfare. These high-growth areas are expected to offset margin pressures in the medium term.

A High-Conviction Investment Case

For investors, Leonardo DRS represents a rare combination of short-term stability and long-term scalability. Its $8.6 billion backlog ensures consistent cash flow, while its exposure to U.S. and NATO spending guarantees a steady pipeline of contracts. The company's balance sheet—$278 million in cash and only $197 million in debt—provides flexibility to fund innovation, return capital to shareholders (via a $0.09/share dividend and $11 million in Q2 buybacks), and weather supply chain disruptions.

The key question is whether investors can stomach near-term margin compression. While germanium shortages and R&D overruns are real, DRS's strategic pivot to ReadyNow solutions and its alignment with defense megatrends (e.g., counter-UAS, space, and hypersonic defense) suggest these challenges are temporary.

Conclusion: A Durable Growth Play in a High-Barrier Industry

Leonardo DRS is not just surviving—it's thriving—in a rapidly evolving defense landscape. Its ability to balance disciplined execution with aggressive innovation, even amid supply chain headwinds, speaks to the strength of its management and the resilience of its business model. With global defense spending projected to hit $1.2 trillion by 2030, DRS is uniquely positioned to compound value for shareholders. For long-term investors, the company's revised guidance, robust backlog, and strategic alignment with U.S. and NATO priorities make it an attractive, high-conviction addition to a portfolio focused on macro-driven, capital-efficient growth.

Investment Recommendation: Buy Leonardo DRS shares, with a 12–18-month price target of $55–$60 (a 30–40% upside from current levels). The near-term risks are manageable, and the long-term tailwinds are undeniable.
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