Mid-cap defense stock and military drone specialist Kratos Defense & Security Solutions (KTOS 5.03%) soared 9.4% through 11:50 a.m. ET Friday after the company reported a substantial earnings beat last night.
Heading into the report, analysts forecast Kratos would earn $0.09 per share on sales of $305.8 million, but Kratos reported an $0.11-per-share profit and sales of $351.5 million.
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Kratos Defense Q2 earnings
Kratos' sales grew 17% in Q2, 15% of which was organic growth, a tremendous accomplishment -- although management said its book-to-bill ratio in Q2 was only 0.7, so business could be slowing down.
Not all the news was good, however. On profits, it's worth noting that the $0.11 profit Kratos earned was a non-GAAP (adjusted) number, and that actual earnings as calculated according to generally accepted accounting principles (GAAP) amounted to only $0.02 per share -- down 60% year over year.
Free cash flow in the quarter also ran negative, with Kratos burning through $31.1 million in Q2.
NASDAQ: KTOS
Key Data Points
Is Kratos stock a buy?
As implied by the weak book-to-bill ratio, Kratos guided below analyst estimates for Q3 revenue, just $315 million to $325 million. The Q2 revenue beat, however, more than makes up for that shortfall, and guidance for the full year is slightly ahead of Wall Street forecasts, with Kratos likely to generate sales of roughly $1.3 billion through the end of this year.
The company also expects to be profitable, at least on an operating basis, but also to continue burning cash through year end. Indeed, analysts who follow the company don't expect to see positive free cash flow before 2027.
Between the negative free cash flow and the lofty valuation -- more than 400 times this year's estimated earnings -- Kratos stock remains a sell for me.
