In accordance with my previous bullish column on Kratos (KTOS) on June 16, KTOS stock has risen tremendously in the last several months. In fact, between June 16 and October 8, the shares rallied a gigantic 156%, clearly showing that the Street has become enthralled with the name.
And in recent months, the company has unveiled a few, new, impressive, positive catalysts, causing me to retain my positive view on its long-term outlook.
After the shares’ huge rally, however, they are changing hands at a huge valuation, while the company’s second-quarter financial results were rather lackluster in some respects, making the short-to-medium term outlook of KTOS stock potentially less than stellar.
Consequently, investors may want to avoid buying more of the shares at this point and could even consider taking some profits in the name.
New, Momentous Developments
On October 6, Kratos disclosed that it had been awarded a contract by the Pentagon which may be worth as much as $175 million. In the first phase of the deal, the firm will “develop an organic sustainment capability for the U.S. Navy’s AN/SPY-1 radar systems,” KTOS stated. The product will provide “ballistic missile defense, integrated air and missile warfare, and maritime domain awareness for the Navy’s surface fleet.”
Further, at the end of September, it was reported that “a long-range kamikaze drone” which the firm is developing in partnership with a Taiwanese organization, is poised to be launched at the beginning of 2026. Featuring AI and anti-ship capabilities, this drone could very well generate meaningful, needle-moving revenue for the firm next year.
Finally, on the company’s Q2 earnings call, held in August, CEO Eric DeMarco reported that the firm had been chosen to undertake a project called Poseidon, which may be worth up to approximately $750 million. Expected to start “ramping up” in the middle of 2027, Poseidon is a “military grade hardware and system program,” DeMarco explained.
And encouragingly, the CEO stated that, as a result of the firm’s recent contract wins, its “third quarter bookings could be particularly strong.”
Mixed Q2 Results and a Very High Valuation
In Q2, the company’s operating income (OI) came in at $3.7 million, well below the $12.5 million of OI that the firm generated during the same period a year earlier. Additionally, its book-to-bill ratio came in at an unimpressive 0.7 to 1, while its net income slipped to $2.9 million from $7.9 million in Q2 of 2024.
On the positive side, Kratos’ Q2 revenue, excluding the impact of acquisitions and divestments, climbed an impressive 15.2% versus the same period a year earlier to $351.5 million, while the firm increased its full-year revenue guidance range to $1.29 billion to $1.31 billion from $1.26 to $1.285 billion previously. Finally, KTOS hiked its full-year EBITDA outlook, excluding certain items, to $114 million to $120 million from $112 million to $118 million previously. Also noteworthy is that analysts, on average, now expect the firm to generate 2026 earnings per share of 77 cents, up from the 72 cents of 2026 EPS that they were calling for, on average, in June.
Still, the shares’ valuation is currently exorbitant, featuring an enormous price-earnings ratio of 189 times. Sharing my concerns about the stock’s very high valuation is investment bank B. Riley, which recently downgraded the shares to Neutral from Buy, citing their elevated cost.
*This article is intended to be informational only; it is not financial advice.
