Kratos Defense & Security Solutions (NASDAQ:KTOS) develops innovative, cost-effective technologies and systems for U.S. National Security, allies, and commercial clients. The company has largely revolutionized certain markets, delivering a number of advanced technologies in innovative ways, emphasizing affordability for its clients. Backed by venture capital, the company has continued to provide some of the most cutting-edge unmanned aerial systems, satellite communications, cybersecurity services, missile defense programs and next generation engine development.

In other words, for investors looking for a top defense stock in this market, Kratos is a top pick. Investors certainly seem to agree, with KTOS stock up 36% over the past year, at the time of writing.

Let’s dive into whether Katos’ strong growth can continue moving forward, and the baseline of growth this company is coming off of. 

Key Points About This Article:

• This top drone stock is among the companies investors looking for defensive growth stocks may want to consider in this current geopolitical environment. 
• The company is a diversified player in providing a range of unmanned aircraft and other defense products to government entities, and could see big growth if global tensions continue to ratchet up. 
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Strong Financials 

Over the past year, Kratos has made a nice pivot from a loss to a profit, and now trades at a rather lofty multiple of 313-times trailing earnings. That’s expensive.

However, on a forward basis, this company’s price-earnings multiple drops to just 42-times, signaling the kind of earnings growth the market is expecting from this defense contractor. On August 7, the company reported strong Q2 2024 results, bringing in $12.5 million in operating income on $300 million in revenue. Net income was $7.9 million, but is expected to expand considerably over the comping year as Kratos aggressively focuses on cost control.

For the current fiscal year, Kratos is now guiding for $0.47 of earnings per share, with EPS expected to grow at a double-digit rate for the foreseeable future. On a 2026 forward basis, this would bring the company’s multiple down considerably, and given the strength and quality of the contracts Kratos has, it’s a company I think investors can be reasonably confident will be able to hit its targets moving forward (pun intended).

Kratos delivered an impressive 42% total shareholder return over the past year, significantly outperforming its five-year average of 4% annual return. This improvement suggests that business momentum is on investors’ side, notwithstanding global tensions which remain high and could lead to additional contracts down the road. 

Why Investors Are Hooked

Let’s just say that Kratos’ fundamentals have improved considerably over the past year. Despite KTOS stock being up 36% over the past year, over a longer-term five year time horizon, this stock is actually up only 11%, meaning most of the gains investors who have been in this stock over the past year have come this year alone. 

Now, for those putting fresh capital to work, that’s a good thing. The company’s times interest earned (TIE) ratio improved to 3.4 as of the end of this past quarter. This ratio reflects Kratos’ strong ability to meet interest payments, given its current debt load. And while Kratos does carry a substantial amount of debt, its total debt to capital ratio stands at around 12%, which is reasonable and considerably lower than the industry average of more than 53%. 

Overall, I think Kratos’ earnings and revenue growth profile, in combination with its strong balance sheet, positions this defense player well for considerable capital appreciation upside over the long-term. So long as the company can continue to execute on its strategy and continue converting its backlog into revenue (roughly 35% of its backlog is expected to be converted into revenue in 2024), continued backlog growth should flow through to its valuation over time. 

Kratos Looks Like a Solid Buy 

Kratos is certainly a stock that carries some risk, as far as being among the “growth” stocks in the defense sector. The company’s stock price has traded roughly flat over the past five years, and a repeat of that performance would certainly be underwhelming for investors.

But if geopolitical tensions ramp up, this drone maker could be well-positioned to capitalize from some strong secular growth tailwinds. This is also a stock that’s trading at a reasonable forward multiple, and looks poised to maintain its status as a profitable company.

Certain things will need to go right in order for this stock to become a winner. But I think the company’s management team is positioning Kratos well to hit its targets, and has been executing well of late. This stock is on my speculative buy list, and I’d encourage readers to do their own research on this particular stock, and see if it fits within their defensive growth portion of their portfolios. 

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