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Why Shares of Kratos Defense & Security Are Soaring Today

By Lou Whiteman - Jul 24, 2020 at 12:37PM

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A big Skyborg win only adds to the company's attractiveness to investors -- and potentially to acquirers, too.

What happened

Shares of Kratos Defense & Security (KTOS -4.16%) climbed 10% on Friday after the midsized defense contractor won a position in the Air Force's futuristic Skyborg Vanguard Program. Kratos was already in the spotlight this week due to acquisition talk, and the Skyborg win further highlights the potential of the company's portfolio.

So what

On Thursday evening, the Air Force said Kratos, Boeing (BA -3.42%), Northrop Grumman (NOC -0.43%), and privately held General Atomics would all move forward in the competition to develop a new artificial intelligence-backed drone. The Skyborg program is the Air Force's attempt to eventually have a fleet of unmanned aerial systems able to adapt in real time in battle.

Kratos' XQ-58A drone in flight.

Image source: Kratos Defense & Security.

The winner or winners will share up to $400 million to develop prototypes to experiment with small drones able to perform a range of missions.

Kratos is already a leader in drones, with its XQ-58A Valkyrie currently in trials with the Air Force and seemingly moving toward an eventual order. Skyborg is still years away from potentially moving the financial needle for Kratos, but the company's inclusion after the field was narrowed down from 18 proposals is a fresh endorsement of its technologies.

Now what

The Skyborg win is a solid potential pickup for Kratos, but the stock's move on Friday is likely based in part on speculation about one defense titan that surprisingly did not make the cut. Lockheed Martin (LMT 0.15%), maker of many of the Air Force's crewed fighters, was a surprise exclusion from Skyborg.

Lockheed also happens to be the company that was mentioned earlier in the week as a potential acquirer of Kratos. Lockheed has upward of $8 billion to spend, meaning it could easily swallow Kratos' $2.15 billion enterprise value. And in interviews, Lockheed Martin CEO James Taiclet has said he is interested in buying "pure-play" defense businesses that would expand the company's expertise in areas in which it already has a presence.

Kratos seemingly fit the bill even prior to the Skyborg awards, but with Lockheed Martin left out in the cold, Skyborg is now yet another reason a deal for Kratos would make sense.

As I said earlier in the week, deal rumors are no reason to buy into a stock, but Kratos, even without an acquisition, has a lot going for it. Skyborg only adds to Kratos' attractiveness both for investors and potentially for acquirers.

Lou Whiteman owns shares of Kratos Defense and Security Solutions and Lockheed Martin. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Kratos Defense & Security Solutions Stock Quote
Kratos Defense & Security Solutions
KTOS
$14.75 (-4.16%) $0.64
The Boeing Company Stock Quote
The Boeing Company
BA
$162.92 (-3.42%) $-5.77
Lockheed Martin Corporation Stock Quote
Lockheed Martin Corporation
LMT
$440.03 (0.15%) $0.68
Northrop Grumman Corporation Stock Quote
Northrop Grumman Corporation
NOC
$490.75 (-0.43%) $-2.13

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