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.
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. .
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.
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.
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