31 May Are you looking to Invest in Kratos? Here’s what you should know!
Kratos Security and Defense Solutions, Inc. (NASDAQ: KTOS) is a mid-sized defense technology company developing cutting-edge transformative systems and platforms for national security and communication needs. The use of proactive research and a streamlined development process enables the company to create and deliver breakthrough technology in the markets it serves.
Kratos Security and Defense Solutions, Inc. (NASDAQ: KTOS)
Market Cap: $1.85B; Current Share Price: 14.77 USD
Data by YCharts
Strength
The Company provides products and services in Unmanned systems, space communications, warfighter readiness, and C5ISR systems. Kratos operates under two primary divisions: Government Solutions and Unmanned systems. Kratos focuses on verticals where tech advances have a multiplier effect, such as unmanned systems, satellite communications, C5ISR, warfighter training, and combat systems. The Company has been able to gain several vital customers, such as the US government and large-scale enterprises.
Kratos is an approved defense contractor and stands to gain from the increased spending on defense, which was around $767 billion in 2020. The fact that the company is a contractor for the Department of Defense is a testimony of the company’s offerings.
The Company recently announced that it acquired Southern Research’s Engineering division which is intended to fuel its growth and expansion plans through strategic acquisitions. Kratos paid $80 million for the purchase, including $75 million in cash and $5 million in the shares of Kratos common stock. The acquisition brings a 54-acre campus with various facilities, machinery, and equipment that constitutes 25% of the buyout price. Most importantly, the Company can leverage Southern Research’s expertise in developing multi-faceted defense products that will help Kratos gain a strong foothold in the strategic weapon system arena.
Kratos manufactures cutting-edge unmanned aerial and aerial target systems, including training and logistics support. The company’s range of unmanned aerial systems includes BQM-167AAir Force Subscale Aerial Target (AFSAT), touted to be the only subscale aerial target platform operated by the U.S. Air Force. It can carry an array of payloads such as scoring, identification of friend or foe, and passive and active radar augmentation, to name a few. Additionally, it manufactures BQM-167i, the world’s most realistic end-to-end weapons-release training system.
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Kratos also manufactures BQM-177A, a Sub-Sonic Aerial Target (SSAT), used by the NAVY and unarguably one of the best high-subsonic, sea-skimming anti-ship cruise missile threat emulation. It also makes an exportable variant, namely BQM-177i. MQM-178 is another offering from the Company that fulfills the need for an end-to-end weapons-release training system providing surface-to-air and air-to-air emulation.
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Furthermore, the Company also designs and manufactures vector and scalar scoring systems, radar cross-section enhancement devices, and various infrared and electronic countermeasures payloads to meet the specific weapon and training requirements.
Kratos uses Rocket Assisted Takeoff (RATO) or pneumatic launch techniques for designing and developing reliable launch solutions. It also provides comprehensive ground launch support solutions such as transportation trailers and maintenance carts, target test sets, ground control stations, and launch equipment. Lastly, it also offers recovery services emphasizing cost and minimal damage.
The Company also offers advanced composite solutions providing comprehensive engineering and manufacturing solutions for composite components and structures.
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Weakness
The Company is one of many companies operating as US Department of Defense contractors and is heavily reliant on them as their largest customer. The current global tailwinds act in the company’s favor, given the upward revision of defense budgets. However, the opportunity comes with substantial risk. In case of a slight shift in fiscal policy or curbing of defense, budgets could significantly negatively impact the Company.
Defense contracts require substantial networking and lobbying capabilities. The Company is competing against defense behemoths that have significant resources, connections, and lobbying power, which could impact Kratos’s prospects. The Company has hired a former US Senate staff member of Armed Services, Robert Winkler, as its new VP of Corporate Development & National Security Programs in April 2022. Robert Winkler has links with the US Department of Defense and the Pentagon and has served as the staff lead for the Air Land Committee.
Inflation is a cause for concern for the Company as it directly impacts its margins, which are generally low for most defense projects. Many Kratos contract backlogs are based on fixed pricing, which may prove challenging if inflation does not decrease.
Opportunity
Defense stocks are back in focus due to the recent Russia-Ukraine conflict as NATO member nations increase their defense spending, a move that will provide impetus to the whole defense sector. European countries have revised their defense spending upwards to prepare themselves for a military invasion amidst renewed demand for conventional warfare. Defense technology is rapidly evolving as threats to national security grow, from military attacks to cyberattacks.
Most recently, Israel was the target of a wide-scale cyber-attack that was the most significant such attack in the country’s history. Israel isn’t alone; countries worldwide are increasingly facing malicious cyberattacks that threaten the nation’s critical infrastructure security and integrity.
Furthermore, a report by marketsandmarkets estimates that the military drones market will reach USD 26.8 billion by 2025 from USD 12.1 billion in 2018, growing at a CAGR of 12.00%. We look at a few companies spearheading technological innovation in this field.
The Business for Unmanned Aerial Vehicles (UAVs) or Drones is burgeoning. They are now being extensively used outside the purview of their original intent and purpose, such as capturing aerial photographs or offering an unparalleled entertainment experience. However, the amalgamation of Drones with path-breaking Virtual Reality (VR) technology redefines the game in various fields, with drones now finding applications in areas such as military and defense, agriculture, engineering, and construction.
In 2015, the Federal Aviation Administration heralded a new era for drones by granting exemptions to companies engaged in construction, agriculture, and insurance to operate drones in the U.S while also making it mandatory for online registration of drones. The possibilities of its applications range from aerial inspections of mammoth infrastructural facilities such as dams and nuclear reactors to use in space and capacity optimization in the construction industry.
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According to a report by Business Insider Intelligence, the sales of drones will be over $12 billion in 2021, growing at a CAGR of 7.6% from $8.5 billion in 2016. The growth will be fueled by consumer drone shipments, enterprise drones/ commercial drones, and government drones. The use of drones in military and defense applications involves monitoring, surveying, and mapping and has extensive reconnaissance, surveillance, and intelligence applications.
Additionally, a Research and Markets report expects that the Global Mobile Satellite Service (MSS) Market, which stood at USD 4.53 Billion in 2019, will reach USD 8.20 Billion by 2027. Furthermore, according to a report by Fortune Business Insights, the global satellite communications market size is expected to reach USD 41.33 billion by 2026, growing at a CAGR of 7.73 percent, from USD 22.61 billion in 2018. The growing demand for Low Earth Orbit (LEO) and Medium Earth Orbit (MEO) satellites are driving the growth in the market.
Kratos is poised to capitalize on these growing opportunities for growth and expansion. The company focuses on investing in research and development initiatives that help advance its satellite monitoring and communication, unmanned aerial systems, and turbine technologies.
Threats
Technology is a constantly evolving field. Breakthrough innovation of today can quickly become outdated in a matter of years. To sustain in such a highly competitive environment, companies must continuously be one step ahead of the competitors in research and development and deliver highly differentiated experiences for their customers.
There is a possibility of a new and better technology emerging in the market, rendering the Company’s technology obsolete. Customers may opt to go with their competitors for their business needs, and the Company may fail to acquire new customers or not be able to achieve its targeted growth.
Kratos faces tough competition from Lockheed Martin, Raytheon Technologies, Northrop Grumman Corporation, and Leidos Holdings, which have considerable clout and lobbying power, besides financial resources.
The Company is heavily dependent on the Department of Defense for its revenue; Kratos needs to diversify its client base and expand into new verticals and markets to ensure that changes in fiscal policy do not negatively impact it.
Kratos is a great acquisition target by larger companies like Lockheed Martin. Still, considering that the Federal Trade Commission (FTC) blocked a deal between LMT and Aerojet Rocketdyne Holdings, citing anti-trust issues such as losing access to AJRD’s propulsion technologies to other contractors, an acquisition may not seem likely in the near future, at least. LMT pulled the plug on its plan to shell out $4.4 billion for acquiring Aerojet Rocketdyne Holdings.
Key Takeaways
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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References
https://www.kratosdefense.com/technologies
https://www.marketsandmarkets.com/Market-Reports/military-drone-market-221577711.html
https://www.businessinsider.com/commercial-uav-market-analysis-2017-8?IR=T
https://finance.yahoo.com/news/kratos-defense-minn-dak-farmers-120000314.html
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