Why Kratos Defense Stock Popped Today
Key Points
The Wall Street Journal reports the U.S. Pentagon may give financial support to U.S. drone companies.
Several companies were named as likely winners.
Kratos was not one of them.
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Kratos Defense & Security Solutions (NASDAQ: KTOS) stock soared 13.8% through 10 a.m. ET Thursday after The Wall Street Journal reported the Trump Administration may make financial investments in U.S. drone manufacturers.
The proposed subsidies appear designed to promote development of low-cost disposable attack drones commonly referred to as first-person view or "FPV," rather than the more advanced XQ-58 Valkyrie drone aircraft that is Kratos's marquee product. As such, the news may not apply to Kratos.
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But then again, it might.
Image source: Kratos Defense.
What we know about the new drone plan
As WSJ reports, the Trump administration is pursuing deals with "a group of drone companies." Privately held Performance Drone Works and Neros Technologies are believed to be two of the companies in the running for government cash, as is publicly traded Unusual Machines (NYSEMKT: UMAC).
Kratos is not mentioned in the WSJ story.
That may sound dispositive, but negotiations are ongoing, and the Pentagon -- which would be responsible for making the investments -- is "continuing to vet the companies." Potentially, that could mean not all the named companies will get funding... or that Kratos won't.
What's next for Kratos?
If Kratos does win government support, what form might that take?
Prior investments by the Trump Administration have been styled as promoting industries critical to national security, while also creating the potential for the government to profit if the investments pay off. For example, when the Department of Energy awarded a 10-year supply contract to rare-earth element miner MP Materials (NYSE: MP) last year, it also demanded stock in MP.
Any deal with Kratos could take a similar form, or comprise loans conditioned on hitting milestones under the Drone Dominance Program, or no-strings-attached grants. For the time being, we simply don't know how this will play out -- but stay tuned.
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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 recommends MP Materials. The Motley Fool has a disclosure policy.
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