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Will 2018 Be Kratos Defense & Security Solutions, Inc.'s Best Year Yet?

By Travis Hoium - Dec 4, 2017 at 1:16PM

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It looks like growth is back at Kratos Defense & Security Solutions, Inc. after a couple of rough years.

It's been an up and down past few years for Kratos Defense & Security Solutions, Inc. (KTOS 0.36%), as revenue has fallen from its peak in mid-2013 and net losses have persisted on the income statement. Despite the challenges, the company is in an attractive market supplying high-tech products to the military. 

Even after a strong run-up since the beginning of 2016, is Kratos looking forward to its best year yet? There are a few factors pointing that direction. 

Drone flying above a city.

Image source: Getty Images.

Unmanned systems are the growth driver

Third-quarter revenue jumped 18.6% to $196.2 million at Kratos Defense & Security Solutions, but unmanned systems revenue jumped 127.3% to $41.6 million. This accounted for 76% of the company's overall growth, so it's really the business segment that investors should be excited about. 

EBITDA for unmanned systems also jumped 400% to $5 million, so it's starting to contribute more to the company's financials. More impressive yet, growth looks like it will continue, with a book-to-bill ratio of 1.4 in the quarter. Management even said it expects the business to "double in revenues from 2016 to 2018."

An increased use of drones by the U.S. government has driven revenue growth for Kratos, as the military looks to gather more information from the air and keep troops out of harm's way. 

All businesses are performing well

Unmanned systems are the highlight for Kratos right now, but its other segments are doing well, too. Government solutions revenue was up $2.6 million versus a year ago to $115.4 million, and public safety and security revenue jumped $4.9 million to $39.2 million. 

Bookings of $228.7 million left the company with a book-to-bill ratio of 1.2, indicating that there's growth to be had for the business overall. New programs are starting to affect the company's top line, and management expects a better mix to improve the bottom line in the next quarter. 

The risk for Kratos Defense & Security today

While Kratos had a great third quarter and looks to be growing more in 2018, it hasn't been able to turn its revenue into profit lately. The bottom line has improved in the past couple of quarters, but the company is still losing money: 

KTOS Revenue (TTM) Chart

KTOS Revenue (TTM) data by YCharts

That makes it tough to be too bullish on a company with a $1.1 billion market cap and $369.7 million of long-term debt. I think Kratos Defense & Security Solutions' core business will improve in 2018 and from that perspective, it may have its best year yet. But the stock is up nearly 40% over the past year, indicating the market is pricing in the improving financials. 

Given the net losses being reported and the high debt load, I'm not willing to bet Kratos' stock will have its best year in 2018, but a surprisingly strong operational year could prove that projection wrong. 

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