Benchmark maintains Kratos stock Buy rating, $38 target

On Thursday, Benchmark analysts maintained their positive stance on Kratos Defense & Security (NASDAQ:KTOS) shares, reiterating a Buy rating and a $38.00 price target. The firm highlighted the company’s rapid transition into a merchant provider of high-value, affordable defense solutions, which is expected to significantly enhance organic growth and improve profit margins.

Kratos recently announced a joint venture with Rafael, an Israeli defense company, to produce rocket motors, tapping into a market opportunity estimated at $1 billion. The collaboration aims to supply thousands of missile rocket motors, bolstering Kratos’s merchant portfolio that already includes partnerships for drone jet engines and space systems, as well as a new facility for hypersonic technology.

Benchmark’s analysis points out that Kratos’s shift towards becoming a merchant provider aligns with the current era’s emphasis on efficiency. The company’s offerings are designed to reduce the risk associated with large Department of Defense (DoD) program developments by providing solutions to a broad range of defense peers.

The fourth-quarter financial results for Kratos were in line with expectations, while the forecast for FY25 EBITDA fell short of the consensus due to the timing of program wins. However, the initial guidance for FY26 is at the higher end of market expectations. The company also reported a strong book-to-bill ratio of 1.5 times. InvestingPro data reveals impressive revenue growth of 11.3% and a healthy current ratio of 3.22, indicating strong liquidity. For deeper insights into Kratos’s financial health and growth prospects, InvestingPro offers comprehensive analysis through its Pro Research Report, available with a subscription.

Kratos’s existing fixed-price contracts are expected to naturally lift margins, and with the expansion of its merchant portfolio, margins could potentially increase by more than 100 basis points annually. While the company trades at a relatively high P/E ratio of 248.64, Benchmark suggests that any pullback in stock price due to the guidance should be seen as an opportunity, as Kratos is well-positioned to benefit from the defense electronics sector’s long-term prospects. InvestingPro analysis indicates the stock is trading above its calculated Fair Value, with additional metrics and insights available to subscribers.

In other recent news, Kratos Defense & Security Solutions reported its Q4 2024 earnings, revealing a slight revenue miss but a better-than-expected earnings per share (EPS). The company achieved an EPS of $0.13, surpassing the forecast of $0.10, while revenue came in at $283.1 million, slightly below the expected $287.58 million. Despite the revenue shortfall, Kratos demonstrated operational efficiency, as indicated by the positive earnings surprise. The company is forecasting a 10% organic revenue growth for 2025, with plans to expand its capabilities in hypersonic systems and tactical drones. Additionally, Kratos announced a joint venture with Rafael to establish Prometheus Energetics, a U.S.-based supplier of solid rocket motors, with production expected to begin in 2027. This venture involves a significant capital investment of approximately $125 million, shared between Kratos and Rafael. Furthermore, Kratos is focusing on enhancing its production facilities, with capital expenditures projected between $125 million and $130 million to support anticipated growth. The company’s strategic initiatives and partnerships are expected to drive future revenue and margin improvements.

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