Kratos Defense & Security Solutions, Inc: Military Tech Stock Up 64% in 2019, Getting More Bullish

KTOS Stock Soars on Q1 Results and Geopolitical Tensions

Geopolitical tensions are running high, and so too are aerospace and defensive stocks. One solid military tech stock that has been doing well is Kratos Defense & Security Solutions, Inc (NASDAQ:KTOS).

Growing interest in defense technology stocks isn’t a big surprise. The trade war between the U.S. and China is in full bloom and tensions between the U.S. and Russia and Iran have escalated quickly as well. Russian President Vladimir Putin has even warned of a possible repeat of the 1962 Cuban Missile Crisis.

On one hand, military tech stocks will benefit from the current geopolitical tensions. But what happens if a full-blown crisis is averted? Many of those stocks will see their share prices retreat.

However, this will most likely not be the case with Kratos Defense & Security Solutions, Inc. That’s because KTOS stock has been rising for a long time—well outside of the purview of recent challenges involving the U.S. and the Middle East.

Moreover, Kratos recently reported strong first quarter results, which topped Wall Street expectations and it provided strong second quarter guidance.

Kratos Defense & Security Solutions, Inc Overview

Kratos Defense & Security Solutions, Inc is a military tech company that counts the U.S. Defense Department as a top customer. It also sells its technology to international governments and commercial customers.

The company’s five operating divisions include: “Microwave,” “Defense & Rocket Supporting Services,” “Unmanned Systems,” “Technology & Training,” and “C5ISR Modular Training.” (Source: “About Kratos,” Kratos Defense & Security Solutions, Inc, last accessed June 25, 2019.)

Through these units, Kratos specializes in unmanned systems, cyber security/warfare, satellite communications, missile defense, microwave electronics, hypersonic systems, and training and combat systems.

Kratos stock is up 64% year-to-date and, more importantly, has increased 100% since the start of 2018 and approximately 445% since the start of 2016.

(Source: “Kratos Defense & Security Solutions, Inc.,” Yahoo! Finance, last accessed June 25, 2019.)

Kratos stock got a big boost when the company announced strong first-quarter results and a great outlook.

In addition to being fueled by ongoing geopolitical tensions in the Middle East, KTOS stock has been juiced by the growing interest in the company’s “Valkyrie” drone. The U.S. Air Force is looking to potentially order 20 to 30 of the drones for additional experimentation. (Source: “US Air Force looks to fast track cash to Kratos Defense for more Valkyrie drones,” DefenseNews, June 17, 2019.)

Kratos made its first successful test flight of the Valkyrie in early March and successfully completed its second test flight in mid-June. It is relatively inexpensive to build, at around $2.0 million per drone. (Source: “Kratos Defense’s Valkyrie combat drone to take flight next week – executive,” CNBC, February 28, 2019.)

Growing interest in the Valkyrie is backed by sustained long-term growth as well. That means that long-term gains are not going to be erased when the media attention surrounding the drone dies down.

Chart courtesy of StockCharts.com

Q1 Revenue Up 12%, Net Income of $3.1 Million

On May 8, Kratos Defense & Security Solutions, Inc announced its financial results for the first quarter ended March 31, 2019.

First-quarter revenue came in at $160.4 million, a 12.2% increase over the $143.0 million recorded in the same prior-year period. Excluding the impact of the February acquisition of Florida Turbine Technologies, revenue increased 9.2% year-over-year. (Source: “Kratos Reports First Quarter 2019 Financial Results,” Kratos Defense & Security Solutions, Inc, May 8, 2019.)

The company reported first-quarter net income of $3.1 million, or $0.03 per share, compared to a loss of $2.2 million, or $0.02 per share in the same period last year.

Adjusted income from operations was $0.08 per share, a 60% increase over the $0.05 per share in the first quarter of 2018.

Looking ahead, Kratos expects to report second-quarter revenue in the range of $175.0 to $185.0 million. At the midpoint, that represents year-over-year revenue growth of 19%.

Second-quarter adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) is projected to be in a range of $16.0 to $18.0 million, a 40% increase over the second-quarter 2018 adjusted EBITDA (from continuing operations) of $12.1 million.

Kratos also reaffirmed its guidance for 2019 with revenue of $720.0 million to $760.0 million for year-over-year organic growth of 12.5% and adjusted EBITDA of $71.0 million to $77.0 million; at the midpoint, that reflects year-over-year growth of 22.3%.

Analyst Take

Kratos Defense & Security Solutions, Inc has benefited from recent geopolitical tensions , but that’s only a small part of it. KTOS stock has been on a tear since 2016 because the company continues to report strong financial results.

And the outlook remains bright for the military tech firm as it continues to provide strong guidance and interest in its Valkyrie drone is just beginning to gain steam. The future for Kratos stock remains bullish, even after tensions with Russia and Iran subside.