Why Kratos Defense Stock Just Dropped
Key Points
Kratos beat on top and bottom lines last night.
Kratos's profits, however, look weak, and the drones company continued to burn cash.
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Kratos Defense & Security (NASDAQ: KTOS) stock tumbled 7.5% through 10:05 a.m. ET Tuesday after despite beating on both sales and earnings last night.
Heading into Kratos's Q4 report, analysts forecast Kratos would earn $0.017 per share on sales of $327.6 million. In fact, Kratos earned $0.18 per share and reported quarterly sales of $345.1 million.
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Kratos Q4 earnings
Despite beating forecasts, Kratos's Q4 performance was "mixed." Sales grew nicely, up 22% year over year. GAAP profits, however, were flat against Q4 2024. (Kratos's "$0.18" profit was a non-GAAP number; actual earnings calculated under generally accepted accounting principles were only $0.03.)
What's more, revenue from drone sales -- Kratos being primarily known as a maker of drones for the military -- grew only 12%. Most of the growth came from the Kratos Government Solutions business, "KGS," which focuses on defensive rockets, microwave products, and "space, training and cyber."
Free cash flow ran negative for the quarter, and negative $137.4 million (or negative $125.4 million, according to Kratos) for the year.
Is Kratos stock a buy?
Was there good news in the report, too? Yes, there was. Quarterly sales growth overall was strong, and KGS segment growth was robust. Full-year sales growth wasn't much worse at 17%.
Management also highlighted a 1.1 book-to-bill ratio for the year, which strengthened to 1.3 in the final quarter, lending confidence to its guidance for growing sales -- anywhere from $1.6 billion to $1.7 billion in 2026. That works out to about 21% growth, which would be better than Kratos enjoyed in 2025.
Ultimately, though, I just can't recommend buying a stock that costs 730 times earnings. Kratos stock remains a sell for me.
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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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