Investing.com -- Leonardo DRS Inc (NASDAQ:DRS) shares rose 3% in premarket trading Friday after Bank of America lifted its rating on the stock to Buy from Neutral, while keeping its price target at $40.
The upgrade comes amid Leonardo’s growing focus on shipbuilding and defense technology modernization, which BofA believes will benefit the U.S. defense contractor, particularly through its involvement with the Columbia-class submarine program.
“We expect the Columbia-class submarine, which accounts for ~10% of DRS revenue, to continue to be well funded and support mid-to-high single digit growth at Integrated Mission Systems (IMS),” BofA analysts led by Ronald J. Epstein said in a note.
“In our view, DRS is the best way for investors to gain exposure to US Navy demand, and we think the recent stock pullback provides an attractive opportunity,” they added.
BofA’s upward revision follows the announcement by former President Trump regarding the creation of an Office of Shipbuilding to revitalize the American shipbuilding industry.
Although the specifics of the Office's role are yet to be detailed, the bank expects Leonardo DRS's proven track record to position it well for taking advantage of new funding and outsourcing opportunities.
Moreover, BofA commends Leonardo DRS for its pivot towards a more shareholder-friendly approach to capital deployment.
The company has initiated its first dividend payment at $0.09 and plans to establish a regular quarterly dividend payment schedule.
Leonardo DRS's Board of Directors has also approved the company's inaugural share buyback program, which is set to repurchase $75 million worth of shares over the next two years.
“Given the recent price pullback, we see opportunities for DRS to execute on this buyback program more quickly than anticipated,” analysts noted.
Vital to DRS’s strategy has been its investment in niche technology. This technology is key for the new era of "connected systems," and Leonardo DRS's product portfolio supports sensors, full-suite integrated solutions, electro-optical/infrared (EO/IR) systems, and on-board computing.
BofA believes these investments are expected to align with long-term trends in defense technology modernization. The bank sees additional upside potential as Leonardo DRS continues to develop these technologies and expands its offerings to international markets.
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