Shares of Kratos Defense & Security Solutions (NASDAQ:KTOS) traded up 11% in February, according to data provided by S&P Global Market Intelligence, continuing a strong run for the defense contractor, which has outpaced the sector in recent years.
Kratos makes electronics, communication equipment, drones used for target practice, and other high-tech defense products. It has been a standout stock for some time now. Shares are up 46% over the past 12 months, easily beating the S&P 500’s 3.2% gain and the SPADE Defense Index’s 3.18% increase. Kratos has been focused on developing a new jet-powered drone that it hopes will one day fly as a “wingman” for aircraft with crews, and perform missions too dangerous for manned planes.
Kratos’ XQ-58A drone. Image source: Air Force Research Laboratory.
The company has made great progress in its effort over the past year, including winning government approval to begin marketing its Mako drone platform to allied militaries. After years of burning through cash and missing analyst expectations, the company has become a more reliable performer. In the process, it has sliced in half the $650 million in debt it had at the end of 2015.
Wall Street has taken notice. The company’s price target was raised by at least two analysts in February leading up to Kratos’ Feb. 28 earnings release.
Kratos shares have been moving the opposite direction in March, down 4.2% for the month so far. The year-end results contained a mix of good and bad news, and investors got a first-hand look at the competition that Kratos’ drones will soon face when Boeing unveiled its own wingman concept.
Much of the turbulence in the quarterly results was due to timing, including the impact of the government shutdown. The Boeing drone, even if it performs to expectations, is unlikely to prevent the Mako or other Kratos drone platforms from winning business.
Kratos is a higher risk/reward stock than most in the defense sector, and it still has significant work to do if it is to live up to its rich 2.9 sales multiple. But its potential remains intriguing. For investors with a high tolerance for risk, Kratos deserves a closer look.