What happened
Kratos Defense & Security Solutions (KTOS 9.12%) reported better-than-expected quarterly results yesterday and said it is making progress with one of its most promising programs. Investors are enthused, sending shares of Kratos up as much as 15% on Friday morning.
So what
Kratos is a defense contractor focused on electronics and drones. For years it has been one of the primary suppliers of "dumb" drones used for target practice, but the company has been developing a line of sophisticated unmanned aerial vehicles (UAV) that could help change the way air battles are fought.
The company's Valkyrie Loyal Wingman drone is designed to fly alongside piloted fighter jets, providing extra firepower and confusing enemy radar systems.
On Thursday evening, Kratos reported second-quarter earnings of $0.09 per share on revenue of $256.9 million, beating the consensus estimate for a $0.06 per share profit on sales of $235 million. CEO Eric DeMarco also highlighted Kratos' work with partners to integrate artificial intelligence (AI) into the Valkyrie, and said orders for the plane are forthcoming.
DeMarco said: "Since our last report, we have now reached agreement with a new national-security related customer for payload and mission system integration into Kratos' Valkyrie, and we have recently received the contract. This is a new initiative that is highly confidential, and if Kratos and our partner are successful, this program could be a significant contributor for Kratos beginning next year."
He said other potential contracts are in negotiation and that if the 2024 U.S. defense bill goes the way the company hopes, Kratos could receive "a separate, additional, largest-to-date Valkyrie-related" award.
Now what
Kratos has always been a company with a lot of promise, but also bogged down by the government's slow procurement process and fears that larger rivals like Boeing would advance their own competing systems.
The stock has languished in recent years as investors grew impatient waiting for new orders, and even after Friday's jump, they still trade at a 50% discount to their highest levels in early 2021.
More patience is needed, though, since even if Kratos' UAVs are a hit, the production ramp-up will be slow, and the government has plenty of other priorities. But the latest results suggest Kratos is making progress toward its goals, and investors are understandably happy with the update.
