What happened
Defense contractor Kratos Defense & Security Solutions (KTOS -0.39%) posted solid results for the last three months of 2022, and management optimism about 2023 was strong enough to prompt an analyst upgrade. Investors are excited, sending shares of Kratos up as much as 19% on Friday morning.
So what
Kratos is a maker of drones, defense electronics, and other products for the Pentagon and government buyers. Most of its drone revenue historically has been from selling "dumb" drones used for target practice, but the company has invested heavily in futuristic "loyal wingman" drones that can fly into battle with piloted aircraft.
The company earned $0.08 per share in the most recent quarter, matching analyst expectations, on revenue that at $249.3 million beat the consensus estimate by about $7 million. For the full year, Kratos revenue grew by 10.7%, and the company ended the year with a backlog of $201.6 million in future business.
"As we begin 2023, every Kratos business is expecting organic growth and we are forecasting Kratos' consolidated '23 over '22 revenue growth of approximately 10%, with increased margins, reduced internally funded investments and increased cash flow," CEO Eric DeMarco said during the company's post-earnings conference call.
The results and commentary were strong enough to prompt Canaccord analyst Austin Moeller to upgrade Kratos to buy from hold, and raise the firm's price target to $14 from $11.50. Moeller noted that management was "particularly enthusiastic" about potential growth in its government business.
Now what
Kratos shares have lost more than half their value over the past year, largely attributable to investors growing impatient waiting for news about that wingman program. The company's Valkyrie tactical drone has completed years of testing with potential government customers, and investors have now been waiting on an order for more than three years now.
They still haven't gotten that order, but DeMarco on the call said the company is still working closely with potential customers. And Kratos is optimistic enough to begin a serial production run of at least 12 Valkyrie drones, with the CEO saying the company wants the aircraft "available to immediately meet expected customer demand."
Kratos remains a rare higher-risk, high potential reward investment in the typically staid world of defense investing. If Valkyrie can perform the way the company hopes, Kratos estimates the company has a potential $10 billion opportunity pipeline out in front of it.
That's best-case, and as the stock's movement over the past year shows, there is no guarantee. But the year-end update provided a reminder of the potential, and investors are excited about the opportunity.
