In 1991, the world changed.

After more than four decades of Cold War, and a growing military-industrial complex in America (with a growing number of defense stocks to support it), the fall of the Soviet Union in 1991 led to a dramatic pullback in defense spending in Western nations, the U.S. included.

It also sparked a wave of closures and consolidations among U.S. defense businesses. Lockheed merged with Martin Marietta to form Lockheed Martin; Northrop acquired Grumman to form Northrop Grumman; Boeing swallowed McDonnell Douglas whole. This has resulted in dramatically fewer but dramatically bigger defense stocks to invest in, and it's a trend that has continued all the way up to ... well, right about now.

In 2020, Palantir Technologies became the first new initial public offering (IPO) of a defense stock to happen in recent memory. Many observers thought rival artificial intelligence (AI) defense stock Anduril might be the second such IPO, perhaps as early as this year. Instead, a little company called Karman Holdings (KRMN 5.99%) claimed that honor.

Debuting on the New York Stock Exchange (NYSE is a subsidiary of Intercontinental Exchange) two weeks ago, Karman quickly shot up from its IPO price of $22 to close its first-day trading at $30.05. Karman stock has mostly treaded water in the weeks since, falling a few percent one day and rising a few percent the next, ultimately closing last week at $31.18.

If you haven't heard of Karman before, don't be embarrassed -- I write about defense stocks, and neither had I. In fact, the company's IPO pretty much escaped my notice until one obscure defense-industry publication highlighted the fact last week.

Now that Karman's public, though, as a defense investor I think it behooves me to check it out. Here's what we know.

Introducing Karman Holdings

Karman describes itself as a space and defense company, evoking echoes of Boeing's Defense, Space & Security (BDS) division. But whereas BDS is a giant $24 billion-per-year business and part of a $66.5 billion aerospace conglomerate, Karman's entire business does barely $280 million in annual sales.

What does Karman do in space? The company has three primary commercial products, all geared toward the construction of rockets. Working from top to bottom, Karman builds fairings to protect rocket payloads, interstage systems between rocket stages, and rocket motors and launchers.

In the military sphere, Karman's products are similar. Instead of fairings, for example, Karman builds systems for deploying munitions. Karman also plays a role in the development of other spacecraft, such as lunar landers, satellites, and interplanetary space probes.

All things considered, then, Karman can best be described as a producer of spacecraft parts.

Image source: Getty Images.

Karman by the numbers

Now that we have a handle on what Karman does, let's take a quick look at how well it does it.

In 2023, the company booked $281 million in revenue, growing 24% in comparison to 2022, according to data from S&P Global Market Intelligence. Karman has reported $254 million in revenue over the first three quarters of 2024, implying about $339 million in annual revenue run rate. Assuming it hits that mark, it will have grown 21% in 2024.

As for profits, Karman lost money in 2022, but it turned profitable in 2023. It generated $11 million in the first nine months of 2024, putting it on track for about $15 million in full-year profit. That would imply a net profit margin of about 4.3%. Free cash flow is similar, with $8 million in cash profit generated over the last three reported quarters, implying an $11 million annual run rate for free cash flow generation.

Now: What do these numbers imply for investors?

Is Karman stock a buy?

Dividing its $4 billion market capitalization by the run rates noted above, we find that Karman stock is currently valued at approximately:

• 8 times trailing sales
• 267 times trailing earnings
• 364 times trailing free cash flow

Suffice it to say that these are very high multiples for a defense stock. Even in the context of my October 2024 report, in which I surveyed 10 of the most popular U.S. defense stocks and concluded that they all cost too much to buy, not one of those 10 stocks cost anywhere near the valuation that's been hung on Karman shares post-IPO.

Therefore, I'm forced to conclude that Karman Holdings stock is overpriced. The only reason I can see for buying shares is that you're looking for a way to lose a lot of money in a hurry.