Why Kratos Defense & Security Solutions Stock Exploded 35% Higher in May

Earnings exceeded expectations -- and guidance did, too.

Rich Smith
Rich Smith
Jun 6, 2017 at 11:13AM

What happened

Shares of tiny defense contractor Kratos Defense & Security Solutions (NASDAQ:KTOS) surged 35.3% higher in the month of May.

So what

What lay behind Kratos' astonishing stock strength? It began with an earnings report.

On May 4, Kratos reported 10% sales growth in its fiscal first quarter 2017. Combining this with a 340-basis-point improvement in gross profit margin and only moderate growth in operating costs, the company was able to report an operating profit margin of 1% -- its third positive operating result in the past four quarters.

Glowing stock chart

Image source: Getty Images.

Now what

This encouraging result, however, was only part of what got investors so excited about Kratos stock in May. Even more important was what the company promised for the rest of this year.

Specifically, Kratos promised that its long cycle of money-losing investment in developing new drones for the U.S. military is coming to a (successful) end. Not only operating profits, but actual net profits could turn profitable as soon as this very quarter (Q2 2017), and profitability should increase as the year progresses.

This trend of rising profitability, says Kratos, will continue into 2018. What's more, 2018 will be the year that Kratos resumes generating positive free cash flow as well. The predictions of profitability, and cash profitability as well, arriving earlier than forecast wowed investors, and drove the huge surge in Kratos' stock price last month.

Now all Kratos has to do to keep the momentum going is deliver on its promises when it reports earnings in August.