Kratos Defense & Security Solutions (NASDAQ: KTOS) investors are about 15% richer today than they were one week ago. That's how much this stock has risen since "beating earnings" in its Q3 report last Thursday.
Thursday's news was just the latest good news from this military drones specialist. The fact is, Kratos beat analyst earnings targets (by double and even triple-digit margins) in each of its past four earnings reports. After three straight years of losing money, Kratos has at last put together one full year of profits, and investors have rewarded Kratos with a 50% gain in share price over the past year.
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The question for investors now is: Is Kratos stock unstoppable? Or is its run about to be done? To find out the answer, let's start with the numbers.
At first glance, Kratos's Q3 2024 numbers were not particularly impressive. $275.9 million in quarterly sales increased just 0.5% over last year's Q3. A book-to-bill ratio of precisely 1.0, moreover, suggests revenue won't grow much in the near future either. (That book-to-bill ratio was also down a bit from Kratos's performance over the past 12 months).
Earnings for the quarter were positive $0.02, which was better than the $0.01 per share the company lost a year ago. Still, it's only two cents -- not a lot of profit to support a stock that costs more than $25 a share!
And yet, Kratos stock is up 15% on this less-than-overwhelmingly great news. Why is that?
Anemic sales growth and weak earnings notwithstanding, the fact that Kratos has put together back to back (to back, to back) profitable quarters is encouraging in and of itself. Analysts polled by S&P Global Market Intelligence predict that Kratos's profits -- expected to reach $0.12 by the end of 2024 -- will triple over the next three years, hitting $0.37 in 2027.
Granted, this still values the stock at 66.5 times earnings (that the company might or might not actually earn) three years in the future, which seems awfully expensive. However, it's not as expensive as negative earnings, which would give the stock a forward P/E ratio of infinity.
Moreover, Kratos added "color" to its earnings report that investors may find even more encouraging. Historically, Kratos has been known for manufacturing a few key products -- aerial target drones (i.e., drones that other people shoot at), more recently expanded to include combat drones (i.e., drones that shoot back), and various communications packages, primarily for satellites.