Kratos continues raking in defense contracts, but its stock comes at a very high price.
Kratos Defense & Security Solutions (KTOS 4.37%) stock enjoyed a second straight day of gains Wednesday as the stock rose 5.5% through 2:55 p.m. ET — significantly better than yesterday’s 1.2% increase.
And yet, it was news yesterday that drove the gains.
Kratos lands a defense contract
Specifically, news that the U.S. Air Force has awarded Kratos a $79.9 million contract to produce 60 BQM-167A “target aircraft systems” (i.e., target drones). The extra $80 million amounts to about 7% of annual revenue for the defense contractor.
And yet, it wasn’t unexpected. As Kratos noted, this order is for the 20th “lot” of drones to be delivered under a five-year supply contract that is worth, in total, up to $374 million for the company. The company expects a total of about 21 lots to be ordered to max out that value, so the contract is actually nearing completion — both good news and bad for Kratos. (Although the contract could certainly be extended or renewed.)
Is Kratos stock a buy?
Long story short, I don’t expect this contract — despite its size — to move the needle much for Kratos stock in terms of changing growth expectations. And that could be a problem for investors, because Kratos is one very expensive defense stock.
Trailing 12 month earnings for Kratos amount to just $10 million, which isn’t a lot to support a $3.4 billion market capitalization. And free cash flow at the defense contractor is even worse — just $2.6 million. As a result, the stock sells for a price-to-earnings-to growth (PEG) ratio of about 340, and its price-to-free cash flow ratio stretches well into the four figures.
Granted, strong earnings growth is forecast, with analysts forecasting profits to roughly triple over the next two years. The analysts had better be right about that, though, because at stock prices like these, nothing less than fantastic growth can justify the extremely high valuation on Kratos stock.
Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
