Leonardo DRS (DRS) performed better than expected in Q2 and is in a "strong position" to capture opportunities related to increased global defense spending, particularly in Navy-focused projects, but much of the upside has been largely priced in, BofA Securities said in a note Tuesday.

Analysts said they still expect the company's new South Carolina facility, which supports the Columbia-class submarine production, to enhance profitability and efficiency, positively impacting near-term valuation. They added that the facility, expected to begin operations in 2026, presents the "most constructive use" of Leonardo DRS' cash right now.

In Q2, the company won its largest recompete and increased its total backlog by 82% year-over-year, the analysts said, adding that while they acknowledge that DRS has reduced its recompete risk and has a strong pipeline of opportunities, they believe the current valuation already reflects this upside. Similarly, any potential gains from the AUKUS program have already been factored into the company's current valuation, they said.

"We see Leonardo DRS as well positioned to capture both growth in mission-critical and emerging end markets while reaping the benefits of high-margin content on legacy platforms. The company's niche electric power offering on the Columbia-class nuclear submarine program provides both sizeable and tangible growth prospects through the out years that should stand the test of any possible budgetary cuts. That said, much of this upside is already priced in," the analysts said in the note.

BofA Securities downgraded Leonardo DRS to neutral from buy while raising its price target to $30 from $26.

Price: 27.13, Change: -1.45, Percent Change: -5.07