Aviation Expert Kratos Posts Fourth Consecutive Profit. Could This Defense Share be Invincible Now?
Aviation Expert Kratos Posts Fourth Consecutive Profit. Could This Defense Share be Invincible Now?
Kratos Defense & Security Solutions (KTOS) investors have seen their wealth increase by approximately 15% over the past week. This significant rise is attributable to the company's impressive Q3 earnings report shared last Thursday.
Thursday's financial update was yet another positive development for this military drone specialist. Notably, Kratos surpassed consensus analyst estimates in each of its last four earnings reports, often by significant margins. Following three consecutive years of losses, Kratos has managed to turn a profit for an entire year, resulting in a 50% increase in share price over the past year.
The question on investors' minds now is: Is Kratos's stock boundless, or is its surge coming to an end? Let's dive into the numbers to find out.
Analyzing Kratos's numbers
At first glance, Kratos's Q3 2024 revenue figures didn't appear particularly impressive. The company's quarterly sales of $275.9 million rose only 0.5% compared to the previous year. Additionally, a book-to-bill ratio of 1.0 implies that revenue growth may remain stagnant in the near future. The ratio also showed a slight decrease compared to Kratos's annual performance over the past 12 months.
The profit for the quarter was modest at $0.02 per share, which represented an improvement from the $0.01 loss reported last year. However, this meager profit margin may not be enough to justify a stock priced at over $25 per share.
Despite these unremarkable Q3 numbers, Kratos's stock still soared by 15%. Why is that?
Additional insights on Kratos
Despite mediocre sales growth and earnings, the fact that Kratos has consistently reported profits over the past few quarters is reassuring in itself. Analysts surveyed by S&P Global Market Intelligence anticipate that Kratos's profits – expected to reach $0.12 per share by the end of 2024 – will quadruple within the next three years, reaching $0.37 per share by 2027.
Although valuing the stock at 66.5 times earnings (which may or may not be earned) three years in the future seems pricey, it's far better than losing money, which would lead to an infinite forward P/E ratio.
Furthermore, Kratos added some optimistic info to its earnings report that might appeal to investors. Historically, Kratos has focused on manufacturing specific products, such as aerial target drones, combat drones, and satellite communications packages.
Recently, however, the company has diversified its product portfolio, particularly in the area of rocket motors. Given the recent demand for rocket motors among defense companies responding to the global need for missile defense, this product has proven to be popular. Kratos also uses these motors in the production of its target drones and combat drones.
The company highlighted its ability to produce about 10,000 small jet engines annually for use in drones and missiles. Furthermore, Kratos is continuing its partnership with Aerojet Rocketdyne (now owned by L3Harris) to develop Zeus 1 and Zeus 2 solid rocket motor systems for hypersonic missile tests and missile defenses. These systems will be used to power Kratos's new Erinyes hypersonic missile and "highly classified ... Dark Fury hypersonic system."
Lastly, on the drone front, Kratos manufactures approximately 165 jet drones annually, with the capability to increase production to 400 annually. Planned drone production includes the Kratos Valkyrie combat drone, for which the company expects to secure Pentagon contracts. Additionally, Kratos has one contract for its Athena drone program and aims to secure another for its Apollo drones.
Is Kratos stock a buy?
To summarize, Kratos has numerous growth opportunities to boost its sales and extend its streak of profitable quarters. However, the company remains cash flow-negative, forecasting anywhere from $10 million to $30 million in cash burn for this year. Furthermore, anticipated sales growth for next year is estimated to be around 10%.
With a current-year valuation of more than 200 times earnings, I would not advise buying Kratos stock at its current share price.
Although Kratos's Q3 revenue growth was modest, its ability to consistently report profits and diversify its product portfolio, particularly in rocket motors, has caught the attention of investors. Analysts anticipate a quadrupling of Kratos's profits within the next three years, which may justify its high valuation from an investing perspective.