With a solid product portfolio, strong order bookings, and a large backlog position complementing revenue and earnings growth potential, DRS Technologies, Inc. (DRS is a leading supplier of defense electronic systems with exposure to the high-growth C4ISR area of the defense budget. Various multi-year contracts, within the defense sector further strengthened the company's position as a key supplier in the tactical secure communications marketplace.
Looking ahead, the $81 per share acquisition of DRS by Finmeccanica S.p.A. is expected to be completed by year-end 2008. However this limits the upside potential of DRS. Thus, we change our recommendation to Hold on DRS common stock. Price appreciation to our near-term valuation target, coupled with the 3 cents per share quarterly dividend, represents annualized total return potential of 8.6%.
As a pure play defense contractor, DRS Technologies is well positioned to participate in growing areas of the defense budget on the strength and performance of its core technology businesses. In our view, the May 2008 merger agreement with Finmeccanica makes strategic sense for DRS. The union will create a $24 billion global defense giant.
Subsequent to declaration of its impending acquisition by Finmeccanica, DRS shares have traded at the upper-end of that range. As of this report, DRS common stock trades at 19.3x our current fiscal year 2009, earnings per share estimate, or at the median multiple value of the military electronics industry. Likewise, the stock also trades at its industry median values based on relative price multiples of sales and book value, yet at the lower end of its comparable peers relative to price-to-cash flow multiples.
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