Why the stock of Kratos Defense & Security Solutions was down today

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What happened

Actions of Kratos defense and security solutions (NASDAQ: KTOS) fell 10% Thursday following a Wall Street downgrade. The stock of defense equipment suppliers has seen good progress over the past year, and one analyst believes the price is above fundamentals.

So what

Kratos, a maker of drones, defense electronics and other products for the Pentagon and other government buyers, has seen its shares gain more than 50% in the past year before Thursday’s trading, and more 800% over the past five years. .

Image source: Getty Images.

Investors are excited about its products, including next-generation drones designed to fly alongside crewed fighter pilots. Kratos’ Valkyrie drone has been in testing with the Air Force for over a year now, suggesting an order could be placed.

Kratos is also widely speculated as a potential inclusion in the space-focused exchange-traded fund planned by Ark Invest.

Baird analyst Peter Arment threw some cold water on that excitement on Thursday, lowering Kratos to neutral to outperform and keeping his price target of $ 29. Arment said he remains positive about Kratos’ outlook but believes the valuation is stretched.

Now what

Kratos has for years been the rare lunar firm in the otherwise staid defense industry, with intriguing potential but also far more volatility than most defense firms. As the company has matured the volatility has eased somewhat, but this is still a stock that has captured the imagination of investors and trades as much on its potential as on its activity. current.

Even after Thursday’s drop, the stock is trading at 4.7 times sales, more than double the multiple attributed to top defense contractors, including Lockheed Martin, Northrop Grumman, and L3 Harris Technologies.

There’s still a lot to love about Kratos, but as Arment notes, it may take some time for that potential to translate into actual sales. We’ll know more on February 25, when Kratos is expected to report fourth quarter results, but after a big rally, it’s fair to ask how much further Kratos shares will have to climb in the coming months.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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