Kratos Defense & Security Solutions continues to secure defense contracts, though its stock price remains significantly high.
Kratos Defense & Security Solutions (KTOS) experienced a second consecutive day of stock gains on Wednesday, with the stock increasing by 5.5% by 2:55 p.m. ET. This marked improvement contrasts with the 1.2% rise observed the previous day.
The rise in stock value can be attributed to recent news on defense contracts.
Specifically, the U.S. Air Force awarded Kratos a $79.9 million contract to produce 60 BQM-167A target aircraft systems, commonly known as target drones. This contract injects nearly $80 million, amounting to approximately 7% of Kratos’ annual revenue.
However, this development was anticipated. According to Kratos, this order represents the 20th lot of drones under a five-year supply contract valued at up to $374 million for the company. Kratos expects to complete around 21 lots to reach this maximum value, indicating that the contract is nearing its end. This scenario presents both positive and negative implications for Kratos, though the contract could potentially be extended or renewed.
Regarding the stock’s viability, the contract’s impact is not expected to significantly alter growth expectations for Kratos. This poses a potential issue for investors, given the high valuation of Kratos stock.
Kratos’ trailing 12-month earnings stand at $10 million, insufficient to support a $3.4 billion market capitalization. Free cash flow is even lower, at just $2.6 million. Consequently, the stock trades at a price-to-earnings-to-growth (PEG) ratio of about 340, and its price-to-free cash flow ratio is notably high.
While strong earnings growth is anticipated, with analysts predicting profits to nearly triple over the next two years, this growth must be realized to justify the stock’s steep valuation.
Rich Smith has no stock positions mentioned in the article. The Motley Fool also holds no positions in any stocks mentioned. The Motley Fool maintains a disclosure policy.
