Shares of Kratos Defense & Security Solutions (NASDAQ:KTOS) fell 18.9% in August, according to data from S&P Global Market Intelligence, with most of that loss occurring in the early days of the month after the defense drone specialist reported second-quarter earnings. The results actually beat estimates for the quarter, but investors were turned off by guidance that was more conservative than many had hoped.
Kratos' second-quarter earnings and revenue topped analyst expectations by $0.02 and about $9 million, respectively, and every one of the company's business units reported revenue growth compared to the first quarter. But part of that beat came at a potential cost to future performance, as Kratos said the second-quarter results were aided by certain contracts closing earlier than expected.
The company said it expects third-quarter revenue of between $175 million and $185 million, short of the $194 million consensus.
Investors were also probably disappointed that there was no announcement of a firm order for Kratos' much-anticipated Valkyrie wingman drone, which has done well in testing. The company reiterated that it is fielding strong interest, but an order still appears to be on hold until late this year at the earliest.
Kratos is a different type of investment than most staid defense stocks, with the company still relatively high-risk/high-reward and much more of a momentum stock than most large defense companies. Heading into August that momentum was mostly positive, with shares up more than 240% over a three-year period.
Excitement over the Valkyrie and other high-tech drone platforms have driven most of those gains, and Kratos thanks to the success of its UAVs is a much less speculative investment than it was just a few years ago. But as the company matures it is coming under some of the constraints associated with investing in the defense industry, including being held to the slow, deliberate pace of Pentagon procurement practices.
Kratos still looks like a long-term winner, and remains one of the best buys among defense stocks. But after a few years of soaring into new altitudes, Kratos shares for now are in a holding pattern.