Why Did Kratos Defense Stock Drop on Wednesday?
Key Points
Kratos stock sold off on no obvious, Kratos-specific news today.
Investors may be worried about EU action in response to President Trump's Greenland threats.
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Kratos Defense & Security (NASDAQ: KTOS) stock crashed 9% through 12:25 p.m. ET Wednesday. No one seems to know why this happened...
But I have a theory.
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Image source: Getty Images.
U.S. vs EU
President Trump has been making noises about wanting to annex (purchase, invade) Greenland lately. Greenland belongs to Denmark, a U.S. NATO ally. It's not happy about this -- and neither are the other NATO nations!
As The Wall Street Journal reports today, European leaders are mulling how to the Greenland issue. One possible response might be to "accelerate ... plans to spend more on defense or shift some military hardware purchases away from the U.S."
What does this have to do with Kratos Defense stock?
That's where Kratos enters the chat. Kratos builds military drones -- mainly for the U.S. military. Still, as Defense Finance Monitor points out, Kratos "has quietly emerged as a significant player in Europe's quest for cutting-edge military capabilities." Kratos's "stealth drones [and] satellite communication networks ... are attracting interest across NATO allies and European defense circles."
Or at least they were.
If Europe turns away from buying weapons systems from the U.S., then that could put the European part of Kratos's growing revenue stream at risk.
Is Kratos stock a sell?
So how big a risk is this for Kratos investors, and does the risk justify today's sell-off?
That's the good news, because the answers are "not big" and "probably not." According to data from S&P Global Market Intelligence, barely 4% of Kratos's revenues come from arms sales to Europe -- versus 83% from North America.
Don't get me wrong. I still think Kratos stock is overpriced at nearly 1,000 times earnings. But if you thought Kratos stock was worth owning last week, this current spat over Greenland probably shouldn't change your thinking, or make Kratos stock a sell.
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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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