Kratos Defense & Security: how the company's business works, is it worth investing in stocks

Kratos Defense & Security: how the company's business works, is it worth investing in stocks

Today we have a speculative idea: take shares in military contractor Kratos Defense & Security Solutions (NASDAQ: KTOS), to capitalize on the growing interest in his field from investors.

Growth potential and validity: 17% within 14 months; 48% in 4 years; 11% per year for 15 years.

Why stocks can go up: legendary god of war Kratos blessed these shares for battle. And there is also something about promising technologies..

How do we act: we take shares now by 22,18 $.

When creating the material, sources were used, inaccessible to users from the Russian Federation. We hope, Do you know, what to do.

No guarantees

Our reflections are based on the analysis of the company's business and the personal experience of our investors, but remember: not a fact, that the investment idea will work like this, as we expect. Everything, what we write, are forecasts and hypotheses, not a call to action. To rely on our reflections or not – it's up to you.

If you want to be the first to know, did the investment work?, subscribe: as soon as it becomes known, we will inform.

And what is there with the author's forecasts

Research, like this and this, talk about, that the accuracy of target price predictions is low. And that's ok: there are always too many surprises on the stock exchange and accurate forecasts are rarely realized. If the situation were reversed, then funds based on computer algorithms would show results better than people, but alas, they work worse.

So we're not trying to build complex models.. The profitability forecast in the article is the author's expectations. We specify this forecast for the landmark: as with the investment idea as a whole, readers decide for themselves, it is worth trusting the author and focusing on the forecast or not.

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What the company makes money on

Kratos is engaged in R&D and production in the field of high-tech and innovative weapons: автоматизированные системы и беспилотные летательные аппараты, космические и спутниковые системы, cyber security, sophisticated combat electronics and all that jazz.

To understand the specifics of the company's work, look at the list of high-profile projects, in which she participated or which she developed:

  • UAV X-61A Gremlin;
  • BPLA Kratos XQ-58 Valkyrie;
  • AI system for drones Skyborg.
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According to the annual report, структура выручки у компании выглядит так.

Solutions for government — 74,98%. All Defense Technologies, except unmanned systems. Services give 44,35% segment revenue, gross margin of services - 26,62% from their proceeds. Sales of goods give 55,65% segment revenue. Segment operating margin — 7,77% from its proceeds.

Unmanned systems — 25,02%. Solutions for air, так и для наземного и морского транспорта. Весь сегмент состоит из продаж товаров. Segment operating margin — 4,65% from its proceeds.

The gross margin of sales of the company's products in both segments - 27,46% from their proceeds.

The company receives from the US government 73%, the revenue from contracts is also calculated here, where Kratos is a subcontractor, and the final consumer is the American state. The private sector provides 27% selling.

International sales account for 19% company revenue. Some of these contracts, however, is carried out through purchases of the U.S. government, so, Saudi Arabia accounts for 5% revenues of Kratos. American segments give 81% selling.

Kratos Defense & Security: how the company's business works, is it worth investing in stocks

Arguments in favor of the company

Fell down. С февраля этого года акции компании подешевели на треть. This was partly due to disappointing reports., investors were partly disappointed by the company's high price. But I think, that this drop creates an opportunity to pick up stocks with a bounce in mind.

Reliability. Most of the company's revenue comes from the US government., which makes her business very reliable and will allow many investors to catch up with her shares, seeking stability in turbulent times.

Pyshch-pyshch. In the finale of the 2005 God of War game, Kratos kills the god of war Ares and takes his place - and all the wars of mankind after that take place with his participation and under his supervision.. Likewise, Kratos will benefit from rising global instability. America has the largest military budget in the world and global interests - I think, a new major war or a decent number of minor conflicts will not take long. Especially since the specifics of Kratos are great for the century of hybrid wars., when the deployment of a large group of forces on the ground is not always possible, but it is very necessary to kill a couple of people in a particular location. So I guess, что спрос на услуги компании будет только расти.

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Bliss and blessing. In theory, Kratos' business could be positively affected by the coming to power in the United States of left-wing liberal progressives.. Я бы не удивился, if, in the medium term, the US defense budget had a redistribution of money in favor of financing high-tech programs - in favor of companies like Kratos, whose production fits well into the progressive picture of the world, in which "big armies are no longer needed", а всю войну «будут вести дроны».

So you can expect big news about new contracts for the company - if not this year, то в промежутке нескольких лет. This will positively affect both the business of Kratos, and on her quotes.

Drones. Victory of Azerbaijan, put a large number of UAVs in the war for Nagorno-Karabakh, gave many observers the false belief that, that "drones will help you win any war". На самом деле нет, Armenians lost due to poor organization of hostilities and betrayal of Yerevan. But it is not important: after all, everyone now really believes, что дроны — это круто. Investors will also count, что дроны — это круто, и потому будут накачивать акции «дроновых компаний». And since Kratos has a capitalization of $ 2.75 billion, then the pumping effect will be large.

On top of that, I would expect the company to expand its UAV program for the commercial sector., where they will really be of great use. But the share of sales of such solutions for the commercial sector in the company's business structure is still extremely insignificant - in the region 0,2% all proceeds, - so I would not expect miracles.

Can buy. There is a very high probability., that the company in the foreseeable future will be bought by a larger defense contractor due to factors, which we have discussed above.

What can get in the way

Expensive. Kratos' future P / E at the level 62,5. It's much more expensive., what defense companies are usually worth. Looking at the ratio of share price to earnings per share, it will turn out, that this figure for Kratos is 3 times higher, чем у ближайших конкурентов. So the quotes can shake.

If everything goes adress. If America begins "perestroika" with cuts in military spending, then the shares of the company will not be good. This is a permanent risk in the current environment., And, Unfortunately, you can't prepare for it.

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What's the bottom line?

We take shares now by 22,18 $:

  1. wait, когда они станут стоить 26 $. Think, этого уровня мы достигнем за 14 месяцев;
  2. wait, when stocks hit the February price 33 $. Here, probably, will have to wait 4 years;
  3. держать акции в горе и радости 15 лет, while America builds an invincible drone armada.

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