Durable Goods (Jun F) -9.4% vs 9.3% Prior, Ex-Trans 0.2% vs 0.2%
On Monday, Benchmark analyst Josh Sullivan reaffirmed a Buy rating and a $38.00 price target for Kratos Defense & Security (NASDAQ:KTOS). Sullivan emphasized the company’s Valkyrie drone as a prime example of a low-cost, high-capability platform. This reiteration comes amidst discussions of the U.S. Air Force’s Collaborative Combat Aircraft (CCA) program’s future direction.
Kratos Defense & Security, known for its affordable Valkyrie drones, is positioned favorably as the U.S. Air Force shifts its focus towards "affordable mass" in its CCA 2 program. This approach aligns with the operational theory presented by Maj. Gen. Joseph Kunkel, who suggested that the Increment CCA 2 drones could likely be more cost-effective to allow for greater quantities. Kunkel, the director of Force Design, Integration and Wargaming, and a deputy chief of staff, indicated that these drones would not only be used in traditional fighter jet roles but also in coordination with a variety of aircraft, including B-21 stealth bombers and E-7s.
The shift in perspective towards more economical drones is a strategic move to "complicate an adversary’s picture," as stated by Kunkel. He explained that achieving a mass of drones is crucial for this strategy, emphasizing the need for them to be low-cost. The Valkyrie drones, priced at approximately $6 million each, offer a significant cost advantage over the first round of CCA drones, which are in the $25 million range.
The previous stance of the outgoing Biden Air Force Secretary suggested that the CCA 2 drones would be more expensive and sophisticated. However, recent analysis and contracts, such as the F-47 program awarded to Boeing (NYSE:BA), which also considers cost value, have influenced the current shift towards cost-effective solutions.
Kratos Defense & Security’s specialization in affordable mass drones like the Valkyrie positions the company to potentially benefit from the Air Force’s evolving requirements. The Valkyrie’s cost efficiency is highlighted when considering the scale of production, with the potential to supply a large number of units at a fraction of the cost of the higher-priced CCA 1 drones.
In other recent news, Kratos Defense & Security Solutions has secured a $30 million contract for producing air defense system hardware, further solidifying its role in U.S. national security efforts. The company also announced its inclusion in the S&P SmallCap 600 Index, reflecting its sustained growth and market position. Benchmark analysts have maintained a Buy rating for Kratos, with a $38 price target, citing its resilience amidst market volatility and minimal exposure to Chinese market disruptions. Additionally, Kratos has begun construction on a new Hypersonic System Indiana Payload Integration Facility, a strategic investment aimed at enhancing the U.S.’s hypersonic capabilities. This facility is expected to create over 100 high-tech jobs and support advanced weapons systems development. The defense budget approval for Fiscal Year 2025, earlier than anticipated, presents a stable financial outlook for Kratos, according to Benchmark. Moreover, the company’s strategy to rapidly deploy affordable defense solutions aligns with the needs of the U.S. Department of Defense. These developments highlight Kratos’ ongoing commitment to innovation and leadership in defense technology.
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