In-line with my previous predictions, Kratos (KTOS) stock first rallied and then fell a great deal since my last column on the name was published on March 6. But with the stock’s valuation significantly more reasonable than was the case in early March and the company enjoying several very strong, positive catalysts, growth investors should consider buying KTOS stock at this point.
However, investors should realize that the company is facing a few meaningful risks.
After KTOS Stock Fell as Expected, Its Valuation Is Much More Reasonable
In my March 6 article, I suggested that the name would climb in the shorter term due to the Iran war and then fall as the conflict wound down. That scenario did indeed play out, as the shares rose from $87 as of the market close on March 6 to $95.31 as of the market close on March 17. And on May 8, KTOS finished at $57.89.
As a result of the decline, the stock’s valuation, although still quite elevated, is much more palatable. As of May 8, the shares had a forward price-earnings ratio of 149 times, down from 167 times at the beginning of March and from 182 times as of the end of September.
KTOS Stock Has Several Powerful, Positive Catalysts
The Pentagon’s upcoming spending plans and priorities are extremely positive for Kratos. The Republicans’ reconciliation legislation passed last year includes funding for a number of the firm’s offerings, including its “hypersonic Valkyrie (collaborative combat drone), solid rocket motors, jet engines for drones, missiles and loitering munitions,” KTOS CEO Eric DeMarco said on the company’s first-quarter earnings call, held on May 6.
DeMarco indicated that Kratos is still poised to obtain a great deal of revenue from the legislation, as he noted that only $30 billion of the $156 billion of defense expenditures authorized by the law had been committed through April, while the Pentagon intends to spend all of the $156 billion by the end of fiscal 2026. Further, the company’s large $2 billion backlog as of the end of Q1 also indicates that it is still poised to generate a great deal of additional revenue as a result of the law.
Going forward, the Department of War is seeking to have companies build about 300,000 drones “quickly and inexpensively.” Also importantly, the Army is looking to purchase “at least one million drones over the next two to three years.” Moreover, the Pentagon is looking to raise its spending on drones with autonomous capabilities to $54 billion in fiscal 2027, representing a huge increase of 24,000% versus the current fiscal year.
As one of America’s leading drone companies and a maker of autonomous drones in partnership with Northrop Grumman (NOC), KTOS is well-positioned to benefit from the War Department’s initiatives described above.
The revenue generated by Kratos’ satellites and its anti-drone lasers can also soar tremendously in the medium-to-long term. Indicating that the satellite business is already taking off, the unit’s book-to-bill ratio came in at 3-to-1 in Q1, while the firm received a contract worth up to $447 million from the Space Force to provide the “ground infrastructure” for Missile Warning and Tracking satellites.
Kratos has developed “a high energy laser weapon” counter-drone system that Google’s AI Overview describes as “cost-effective.” After the U.S. shot down many Iranian drones using very expensive missiles, the Pentagon is looking for more cost-effective anti-drone systems, providing Kratos with a significant opportunity.
In light of all of these powerful, positive catalysts, it’s not surprising that Kratos anticipates “accelerating future growth throughout 2026 and into 2027,” according to its CEO.
Meaningful Risks
While information on the amount of revenue Kratos generates from Ukraine wasn’t readily available, drones are a critical component of the country’s warfighting strategy, suggesting it may procure a significant number of them from the company.
And after Russian President Vladimir Putin recently said that his country’s war is “coming to an end,” the conflict could wind down, causing Kratos’ revenue from Ukraine to drop significantly and potentially meaningfully lowering its top and bottom lines.
Meanwhile, the competition in the drone space appears to be quite intense, as the Pentagon in February invited no fewer than 25 companies to present their attack drones to the agency.
Finally, Kratos’ elevated valuation makes the name more risky than many other highly promising equities.
The Bottom Line on KTOS Stock
In light of Kratos’ catalysts and powerful growth (the company’s sales climbed 15.6% last quarter versus the same period a year earlier, excluding the impact of its acquisitions), KTOS stock is attractive for growth investors despite its high valuation.
But investors should remember that the shares do pose significant risk.
*This article is intended to be informational only; it is not financial advice.
