Kratos Defense & Security Solutions, Inc. KTOS recently delivered mixed fourth-quarter 2024 results. While the bottom line surpassed the Zacks Consensus Estimate, the top line missed the same. However, both metrics improved on a year-over-year basis. 

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The year-over-year improvement can be attributed to solid revenue growth from its Turbine Technologies, C5ISR, Defense Rocket Support and Microwave Products businesses, along with increased sales of its target drones. The company’s cash and cash equivalents as of Dec. 31, 2024, totaled $329.3 million, which improved significantly from the year-ago figure of $72.8 million. 

Such impressive operational results might encourage investors to rush to buy this stock. However, a prudent investor knows that a significant decision like buying a stock should not depend on a company’s single quarterly performance alone. Instead, one should be mindful of its performance over the past year in terms of share price return, long-term prospects as well as risks (if any) to investing in it. We have provided a detailed discussion on this, as one can see below.

KTOS Stock Beats Industry, Sector & S&P500

Kratos Defense’s shares have surged 36.1% over the past year, outperforming the Zacks aerospace-defense equipment industry’s gain of 22.5%. The stock has also surpassed the broader Zacks Aerospace sector’s return of 1.5% as well as the S&P 500’s gain of 18.5% in the said time frame.

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A similar stellar performance can be witnessed in the share price return of other industry players like Curtiss-Wright Corporation CW, Teledyne Technologies TDY and Heico Corp. HEI over the past year. Shares of CW, TDY and HEI have surged 35.5%, 19.7% and 17.8%, respectively. 

What’s Been Pushing KTOS Stock Up?

Kratos Defense’s shares have been riding high at the bourses on the back of solid contract wins, thanks to the company’s combat-proven defense products, solid defense budget funding offered by the U.S. government and diversified product portfolio.  

Impressively, in January 2025, KTOS clinched a five-year OTA contract worth $1.45 billion for the Multi-Service Advanced Capability Hypersonic Test Bed (MACH-TB) 2.0 under Task Area 1. This contract marked the largest award secured by KTOS in its history. With Mach-TB intended to provide an affordable bridge between hypersonic ground tests and system-level flight tests, the aforementioned award win signifies Kratos Defense’s strengthening footprint in hypersonic technology development. 

Earlier in October 2024, the company revealed its partnership agreement with Radisys Corporation to develop cloud-native 5G-NTN (non-terrestrial network) solutions for satellite connectivity. These solutions will be available through Kratos OpenSpace Platform, the only commercially available, fully software-defined satellite ground system. 

In July, KTOS joined forces with GE Aerospace to develop and produce small, affordable engines that could potentially power unmanned aerial systems (UAS), collaborative combat aircraft and similar applications. These partnerships indicate KTOS’ versatility in providing a wide array of products, from combat drones to commercial satellite systems. 

Can KTOS Continue With Its Winning Streak?

With the geopolitical and global security landscape acting in favor of the defense industry, growth opportunities for stocks like KTOS remain immense. To this end, it is imperative to mention that Kratos' Microwave Electronics business, which supports Iron Dome, Tamir, Iron Sting, Arrow, Barak and other systems, constitutes a record-level backlog and opportunity pipeline. This business growth will be further supported by the expansion of its existing microwave facility as well as a new production facility, both of which are in Israel and expected to be completed this year. 

Amid growing hostilities across the world, KTOS expects to see increased demand for its target drone, ballistic missile targets and hypersonic target franchises. To capitalize on this enhanced demand, Kratos has been making steady investments to expand certain of its production facilities, particularly for microwave products, rocket systems, and hypersonic businesses. This, in turn, should significantly boost its top and bottom-line figures in the days ahead. 

A quick sneak peek at its near-term estimates reflects a similar picture. 

Upbeat Estimates for Kratos Defense

The Zacks Consensus Estimate for KTOS’ first-quarter 2025 sales suggests an improvement of 9.5% from the year-ago quarter’s reported figure, and the same for earnings indicates a rise of 18.2%. A similar improvement trend can be observed in its 2025 estimates. 

On the other hand, the bottom-line estimate for first-quarter and full-year 2025 remained unchanged over the past 60 days. This indicates analysts' confidence in the company’s earnings growth ability.

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Image Source: Zacks Investment Research

Risks to Consider Before Choosing KTOS

While KTOS offers strong growth prospects, it continues to face a few challenges that one should take into account before investing in the stock. It continues to be affected by various unfavorable macroeconomic conditions, including supply-chain disruptions that have been plaguing industries across the globe. This has resulted in delays in the receipt and delivery of materials, parts, supplies, etc., which, in certain instances and for certain items, are significant. To mitigate the adverse impact of these delays, Kratos has implemented advanced and larger lot purchases of certain materials and parts. 

This has resulted in an increased use of its working capital. This is expected to continue, at least in the near term, which may affect the company’s cash flow. Evidently, its cash flow from operating activities in 2024 plunged 23.8% from the prior-year figure. 

Moreover, the company’s return on equity (ROE) is lower than that of its industry, which might concern its investors.

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KTOS Stock’s Discounted Valuation

In terms of valuation, KTOS’ forward 12-month price-to-sales (P/S) is 2.88X, a discount to its industry’s average of 6.15X. This suggests that investors will be paying a lower price than the company's expected sales growth compared to that of its industry.

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What Should an Investor Do?

Investors interested in KTOS stock can consider adding it to their portfolio now, considering its discounted valuation, year-over-year growth suggested by its sales and earnings estimates as well as stellar performance at the bourses over the past year.

The company’s Zacks Rank #2 (Buy) also supports our investment thesis. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
 

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This article originally published on Zacks Investment Research (zacks.com).

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