Kratos Defense & Security Solutions: The Stock Price Run-Up Is Overdone

This article was first published on Seeking Alpha on July 9, 2019.

Kratos Defense & Security Solutions, Inc. (KTOS) is a small-cap defense contractor with some niche market strengths in aerial target drones, space and satellite communications and microwave electronics. The company’s stock price has gained over 400% since early 2016 on growing revenue, improved financial performance and market expectation of leadership and growth in the unmanned combat aerial system (UCAS) market. The stock is trading at a 10-year high and the P/E ratio is ~68. But the optimism is overdone. Kratos’ efforts in the nascent UCAS market may not pan out due to competition and limited market. Kratos had years of persistent losses under current management. The company diluted existing shareholders to pay debt and complete acquisitions. Despite the potential for UCAS, I view Kratos as a sell based on past financial performance, competition in the UCAS market and current overvaluation. I believe that stock has approximately a 55% downside at the current valuation.

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