Better Drone Stock: Kratos Defense vs. Northrop Grumman

Kratos Defense and Security Solutions (NASDAQ: KTOS) and Northrop Grumman (NYSE: NOC) present two distinct options for capitalizing on growing demand for military drones. Kratos is a high-growth pure-play drone maker, while Northrop Grumman is a large military contractor with significant exposure to drones and other franchise programs.

Both defense stocks are down so far this year, though. Northrop Grumman's tight margins, partly due to fixed-price contracts, have helped push its shares down by more than 6% so far this year. Kratos, after a huge run-up early this year, has fallen back to Earth, with its shares down by more than 35%, as rising costs play a big role.

Let's see which drone stock is better right now.

Image source: Getty Images.

Kratos offers more revenue growth

The San Diego company is a favorite of growth-oriented investors seeking pure-play exposure to cheap, autonomous combat drones and target systems. A significant portion of Kratos's business is directly tied to uncrewed aerial systems (UAS) and target drones, such as the BQM-177 and the XQ-58A Valkyrie, which uses some Northrop Grumman technology.

The company focuses on high-performance, low-cost jet drones that are mass-produced and used in swarms in combat. Over the past five years, the company has increased revenue by more than 65%, compared with just more than 17% for Northrop Grumman. In the second quarter, Kratos reported 30.5% growth year over year in revenue at $458.8 million, and the company's defense rocket systems had 50.2% sales growth compared to the same period last year. Despite the rising revenue, earnings per share (EPS) were flat at $0.02.

Kratos increased its annual revenue guidance to $1.75 billion to $1.81 billion, representing a 32.2% increase at the midpoint.

Northrop Grumman has a better product balance

Northrop Grumman stands to benefit particularly from surging demand for military drones, where it serves as a primary contractor for high-altitude, long-range intelligence, surveillance, and reconnaissance (ISR) aircraft.

Its uncrewed lineup includes the MQ-4C Triton for 24-hour maritime reconnaissance, the RQ-4 Global Hawk, which offers more than 30 hours of continuous surveillance, and the autonomous MQ-8B Fire Scout helicopter. Northrop also builds the NATO Alliance Ground Surveillance system and highly adaptable Bat drones, which can be configured with specialized fuel tanks and sensors for targeting, communications, or reconnaissance.

Beyond its autonomous capabilities, Northrop Grumman secures major strategic modernization efforts through multidecade prime contracts, including the B-21 Raider stealth bomber and the LGM-35A Sentinel ICBM system.

These foundational franchise programs supply predictable, multibillion-dollar revenue streams that help insulate the business from macroeconomic shifts.

Northrop Grumman is more profitable with a better valuation

Supported by strong U.S. Department of Defense and international allied demand, the company ended the second quarter with a record $105 billion backlog.

It reported revenue of $10.9 billion, up 5%, year over year, but EPS fell 6% over the same period in 2025, to $7.68.

The company raised its yearly revenue guidance, saying it expected revenue between $43.75 billion and $44.25 billion, up from $43.5 billion to $44 billion and a jump from the $42 billion it reported in 2025. It also increased its yearly market-to-market (MTM) adjusted EPS estimates. Initially, the company had predicted MTM adjusted EPS to be between $27.40 and $27.90, but now says it should be between $28.60 and $29.10.

Northrop, considering its big backlog and steady growth, is underpriced compared to Kratos and to its closest peers of Lockheed Martin (NYSE: LMT), L3Harris (NYSE: LHX), General Dynamics (NYSE: GD), and RTX (NYSE: RTX). It trades at less than 17 times trailing earnings.

Northrop Grumman's dividend stands out

Northrop's capital distribution is designed to return at least 85% of free cash flow to shareholders through dividends and share buybacks. Northrop Grumman's most recent quarterly buyback was $62.79 million as of March 31, following a $388.87 million buyback in December 2025 and $206.57 million in September 2025.

The company has increased its quarterly dividend for 22 consecutive years, including a 6.8% raise this year to $2.47, equaling a yield of 1.79% at its current share price. That's more than the S&P 500 (SNPINDEX: ^GSPC) average of 1.04%. Kratos does not offer a dividend.

A relatively easy choice

Unless your only concern is revenue growth, Northrop Grumman appears to be the better drone stock of the two. It has other programs beyond drones that generate revenue, and the company has the size and scope to drive growth through acquisitions.

The other main advantage for Northrop is that its shares are undervalued relative to peers, and certainly relative to Kratos.

However, Kratos may be a good long-term stock for investors who are not risk-averse, particularly now after its shares have tumbled significantly. With its high double-digit revenue growth, it could be a solid long-term hold.

James Halley 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.