Why Did Kratos Defense Stock Drop on Wednesday?
Key Points
KeyBanc analyst Michael Leshock raised his price target on Kratos defense stock this morning.
Boom-times in space and defense spending have given Kratos a sky-high share price.
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Kratos Defense & Security (NASDAQ: KTOS) stock tumbled 5% through 12:12 p.m. ET Wednesday, and here's the weird thing:
About the only news about Kratos today is good: this morning, KeyBanc analyst Michael Leshock raised his price target on the stock by nearly 50%, to $130 per share.
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Image source: Getty Images.
Why KeyBanc loves Kratos
As Leshock explains in his note, covered on TheFly.com this morning, the space and defense industries provide "an ideal macro environment" with "significant growth opportunities ... persisting through 2026."
Kratos is looking to capitalize on these opportunities to fuel an expansion that has driven 12% annual revenue growth over the past five years, and Leshock thinks this is a good reason to buy the stock.
The un-Leshocking news: This analyst rates Kratos stock "outperform."
Is Kratos stock a buy?
Is he right about that?
I'm not so sure he is. Consider: While Kratos has grown its revenues nicely, from less than $750 million five years ago to nearly $1.3 billion over the last 12 months, it's still earning barely any profit on those revenues. Indeed, the $20 million in net income Kratos reported over the past year is less than the $79.6 million it earned in 2020!
The company's cash flow situation is even worse. Free cash flow over the past 12 months is negative $93.3 million as the company continues to consume cash.
Will things improve for Kratos? Perhaps. Most analysts forecast earnings of $60 million in 2026, for example, triple current earnings. Even if Kratos hits that target, though, at a $20 billion market cap, that means the stock costs a staggering 333 times forward earnings.
At that price, I can't call Kratos stock anything other than 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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