Why Is Kratos Stock Dropping?

Technology has played an increasingly critical role in how national defense, and military tools, vehicles, and weaponry have changed dramatically over the past few decades. Autonomous fighter jets, mixed-reality soldier training, drone warfare, and space communications are no longer the stuff of science fiction.

Instead, it’s exactly the kind of technology solutions that Kratos Defense & Security (NASDAQ: KTOS) delivers for the US military. Anticipation for the company’s role in defense solutions drove KTOS share price soaring upon its public markets debut but sentiment has severely dampened since, but why?

And why is Kratos stock dropping? After investors realized the revenue wasn’t there to support the company’s elevated valuation, Kratos share price took a swift nose dive. The stock tumbled to as low as $5 in 2012, but it has slowly been moving back uphill. KTOS is up by nearly 20% over the past five years, though the bulk of that improvement came in the last 12 months.

That was driven by February news that Kratos had earned a monumental new contract with the US Space Force that could be worth up to $579 million.

Another positive sign is that the company beat earnings estimates for each of the past four quarters, and finally became profitable in the 4th quarter of 2023. But even still, Kratos stock has sold off a bit since the earnings release.

So is Kratos Defense & Security a buy?

Positive Signs for Kratos Defense 

In the 4th quarter of 2023, the company reported $273.8 million in revenue, a 9.8% jump from the same quarter of 2022. That beat analysts’ expectations by 7.63%.

Full-year revenue was $1.04 billion, a 15.5% year-over-year increase. Organic growth for 2023 was 12.6%, and Kratos expects around 10% organic growth in 2024.

Another big win from the 4th quarter was Kratos turned profitable. The company logged a GAAP net income of $2.4 million and adjusted earnings per share (EPS) of $0.12, a vast improvement over the $8.3 million net loss last year and the corresponding EPS of -$0.08. Kratos beat EPS estimates for the quarter by over 42%.

The company’s guidance for 2024 predicts revenue between $1.13 billion and $1.15 billion for the year, which is also higher than expected revenue of $1.1 billion.

Overall, it was a solid quarter for Kratos, and the stock jumped almost 17% after the earnings report but investors slowly backed away after KTOS hit $21.60, and the stock is currently trading at around $18 per share.

Will Kratos Defense & Security Stock Keep Going Up?

While there was a lot to like about the 4th quarter earnings report, investors are still reticent on KTOS. The stock has yet to reward early investors, and the company will have to do more to entice new buyers. The light at the end of the tunnel may well come in the form of the deal with the US Space Force.

Phil Carrai, president of the Space, Training, and Cyber division for Kratos, touted the company as one of the few defense players capable of providing the cutting-edge technology the Space Force demanded. Kratos will support the military by providing satellite technology for military communications.

Kratos is the sole recipient of the contract, and it was surely a big win for the company, but it remains to be seen how soon the deal will impact revenue. Elsewhere, Kratos has found success with its unmanned aerial vehicles (UAVs), such as autonomous fighter jets.

To that end, the company finalized a deal to purchase Sierra Technical Services in the 4th quarter. Sierra just landed a $77 million deal with the US military to produce an autonomous fighter target platform. That is a contract that Kratos will now oversee. In the 4th quarter of 2023, the company already realized $6.4 million in revenue from Sierra.

What Does Wall Street Think?

Despite those landmark deals, Wall Street is just as hesitant as investors at large have been to get behind Kratos.

Sentiment may be changing, however with 8 of 11 analysts rating the stock as a Buy at this price point. The highest forecast implies the stock may reach as high as $25 per share, a 36.4% increase from where it currently trades.

The average price target is $21.91, which still represents a 19.5% gain over the next 12 months. There isn’t a Sell rating on the stock currently but there are three hold recommendations. The lowest forecast has KTOS falling by 7.26% to $17 over the next year.

It may be disheartening for investors that Sheila Kahyaoglu, an analyst for Jefferies, dropped her price target for Kratos stock to $20 from $22 per share. The downgrade was driven by concerns about federal budgeting for the year.

What Is The Future For Kratos Defense & Security?

Earnings beats and new partnerships appear to point to new life for a battered stock.

The company’s price-to-sales (P/S) multiple of 2.29x would seem to bear that out. While the P/S value might be low compared to technology stocks as a whole, major aircraft manufacturers Boeing and Lockheed Martin have P/S values below 2.

It may be unfair, however, to put Kratos in the same boat with aerospace companies that are far more established. On a more even playing field, aerospace company Rocket Lab, which makes technology comparable to Kratos, has a P/S multiple of 7.7x. In that light, KTOS appears to be somewhat undervalued.

Kratos Defense & Security Stock: Buy or Sell?

The initial enthusiasm around Kratos Defense & Security died down a long time ago, and it will take significant developments before the company can earn back investors’ trust. With that said, the Space Force deal may be the catalyst KTOS holders need to ignite share price growth.

Outside of that deal, the company has made significant strides in its UAV models and the Sierra acquisition will likely result in a lucrative new government deal. Kratos has beaten earnings and revenue expectations for the past year and expects revenue growth to continue in 2024.

There is certainly risk involved with buying KTOS because it hasn’t performed well over its lifespan as a public company but there are signs of hope for investors who are willing to stick with it for the long haul.

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