Why Kratos Defense & Security Stock Popped Today

Key Points

• Elroy Air has hired Kratos to help it build the Chaparral VTOL military cargo drone.

• Production will begin in 2026.

• Kratos is a drone stock costing nearly 1,000 times trailing earnings.

• 10 stocks we like better than Kratos Defense & Security Solutions ›

Kratos Defense & Security Solutions (NASDAQ: KTOS), a leading manufacturer of drones for the U.S. military, gained 4.6% through 12:20 p.m. ET after announcing a new five-year strategic manufacturing agreement with Elroy Air.

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Elroy who?

Elroy Air is hardly a household name, so it may not be immediately apparent why this is good news. Based out of San Francisco, Elroy Air is a 10-year-old start-up building "autonomous aerial cargo systems for middle-mile logistics and military resupply."

In other words, it builds remotely operated aircraft that deliver supplies to military units in the field.

To further this effort, Elroy picked Kratos to serve as its "exclusive U.S. manufacturing partner for the Chaparral," described as a hybrid-electric autonomous vertical takeoff and landing (VTOL) cargo drone that can carry 300-lb. payloads up to 300 miles.

Is Kratos stock a buy?

Kratos notes that manufacturing of the Chaparral will begin in 2026, and says Elroy plans to build the aircraft at high volume. This suggests that revenue from the contract could be substantial. However, Kratos did not provide any specific figures for estimated revenue from the contract -- nor even define precisely how many units "high volume" might entail.

What we do know is this: Kratos is a $13.6 billion company that earned less than $15 million last year. (That's right, its price-to-earnings ratio is verging on quadruple digits, getting awfully close to a P/E of 1,000.) Kratos is also burning cash (negative $61 million in annual free cash flow).

Although Kratos does have nearly $500 million in the bank, and can afford to burn some cash for a while, longer-term these are not great numbers. Unless profits grow spectacularly over the next few years, Kratos stock will be a sell for me.

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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.