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Why Kratos Defense & Security Stock Just Dropped 20%

By Rich Smith – Updated Feb 25, 2020 at 1:37PM

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Sales and earnings miss estimates -- and the guidance ain't great, either.

What happened

On another hard day for the markets, with the S&P 500 down 1.5% at one point, shares of defense contractor and drone maker Kratos Defense & Security Solutions (KTOS -2.22%) are falling harder than most and were down 20.5% as of 1 p.m. EST Tuesday.

Kratos reported Q4 earnings Monday night, and the news wasn't great. The $0.09 per share in pro forma profit that Kratos earned in Q4 was a penny shy of Wall Street estimates, and $185.1 million in quarterly sales missed expectations by more than $12 million.  

Glowing red stock arrow trending down

Image source: Getty Images.

So what

The news wasn't all bad. Although short of estimates, Kratos grew its sales 13% year over year in Q4 and 16% year over year for 2019 as a whole. Kratos was also GAAP profitable, albeit not as much as the pro forma number noted above might suggest. Q4 profits declined 25% year over year to $0.03 per share.

Kratos also turned in its first full-year GAAP profit since 2015: $0.11 per diluted share and a big improvement over last year, despite growing its share count (which reduces profits per share).

Kratos even generated positive free cash flow for the year (before accounting for cash spent on acquisitions). According to S&P Global Market Intelligence data, this was the first time that has happened since 2012.

Now what

Unfortunately, it doesn't look like Kratos will be able to keep it up. In giving guidance for the new year, management warned that free cash flow generation will range from positive $7 million to negative $18 million, including capital expenditures of $43 million to $48 million. Some of this capex, but not all, is related to the company's plan to build 12 Valkyrie aircraft before a customer production award -- basically building the drones on spec hoping the Pentagon will buy them. 

That ominous note of a return to cash burn -- combined with management guiding toward only $160 million to $170 million in Q1 2020 revenue when Wall Street wants to see $190 million at minimum, and only $740 million to $780 million in full-year revenue (the Street was expecting $832 million) -- is probably the reason Kratos stock is down 20% today.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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