Ahead of the Bell: DRS downgraded after buyout talk

Friedman, Billings, Ramsey & Co. analyst Patrick McCarthy cut his rating to "Market Perform" from "Outperform."

The Parsippany, N.J.-based company said Thursday said it is "contemplating a potential strategic transaction," though it made no mention of a sale.

The release came after the Wall Street Journal reported Finmeccanica SpA, an Italian aerospace and defense company, is in advanced talks to buy DRS.

Shares jumped 16 percent on Thursday, and are up 36 percent year-to-date.

Since at this point the transaction remains a rumor, and because DRS is likely not a willing seller, McCarthy advised investors to take a profit.

Foreign investment in some U.S. companies requires approval from the Treasury Department's Committee on Foreign Investment in the United States, a complicated process that can take some time, he said.

"In our opinion, the primary national securities issues that would need to be addressed include the Italian government's one-third ownership of Finmeccanica and certain high-end and classified DRS technologies," McCarthy said in a note to clients.

His $65 price target implies he expects the stock to drop about 12 percent from Thursday's $73.89 close.

DRS sells products and support services to U.S. and international military forces, intelligence agencies, aerospace and defense contractors and homeland defense customers.