Why Kratos Stock Popped After Earnings
Key Points
Investors loved Kratos's headline numbers in last night's earnings report.
GAAP profits were only flat year over year, however, and free cash flow looks decidedly negative.
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Kratos Defense & Security Solutions (NASDAQ: KTOS) stock jumped 6.7% through 11:15 a.m. ET Wednesday after rushing right past analyst earnings forecasts last night.
Heading into the report, Wall Street had Kratos pegged for a $0.13 per share profit on $410.4 million in sales. In fact, Kratos earned $0.21 per share on sales of $458.8 million.
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Kratos Q2 earnings by the numbers
Kratos grew its sales by 30% year over year, with 19% organic growth. Curiously for a company that's best known as a drone stock, most of this growth came through Kratos's government solutions business, which provides satellite communications and intelligence services, electronics, and training systems -- rather than the drones unit (called "unmanned systems").
Drones revenue increased only 8%.
The other interesting part of Kratos's report is that the $0.21 "profit" that got investors so excited today was, in fact, only a pro forma, non-GAAP profit. Actual earnings for the quarter when calculated under generally accepted accounting principles (GAAP) was only $0.02 per share -- flat against one year ago.
What does this mean for Kratos stock?
And this news gets worse. While Kratos was at least profitable -- if much less profitable than at first appeared -- free cash flow at the defense stock actually ran negative. Indeed, with more than $75 million in cash burned in just the first six months of this year, Kratos is on course to burn $150 million in 2026.
The good news is that as the company converts manufactured products into cash, Kratos expects to be able to correct course and burn significantly less cash as the year progresses -- perhaps as little as $85 million. Even if it succeeds at that, though, I can't see myself investing in this barely profitable stock until FCF turns positive.
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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Kratos Defense & Security Solutions. The Motley Fool has a disclosure policy.
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