Kratos Defense & Security (KTOS +1.81%) stock got a huge lift yesterday after President Trump called for a huge expansion of the U.S. defense budget to $1.5 trillion. Shares of Kratos surged again Friday after two separate analysts raised their price targets on the military drones stock.
As of 12:10 p.m. ET, Kratos stock is up 8.6%.
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Why Wall Street loves Kratos
In twin ratings hikes, first B. Riley raised its price target on Kratos to $128 per share, then Truist hiked its price target to $135.
Both analysts call Kratos stock a "buy," with Truist citing "rising aircraft production and sustained aftermarket demand," as reasons to own the stock, according to notes on TheFly.com. The analyst added that "recapitalization, geopolitical tensions, and replenishment needs should sustain demand" for military hardware, benefiting the stock.
NASDAQ: KTOS
Key Data Points
Is Kratos Defense stock a buy?
And yet... at the same time as Truist was raising its price target on Kratos, the analyst injected a note of caution. "Elevated valuations" on defense stocks, warned the analyst, make stock selection "crucial." Meaning there's significant risk of overpaying if you don't watch valuations closely.
This is especially true in the case of Kratos.
Priced at an insane 800 times trailing earnings, Kratos also costs far more than the 1x sales valuation I usually apply to defense stocks. Many analysts are optimistic about the stock, forecasting for example a quadrupling of earnings between 2025 and 2027. But Kratos earned just $20 million last year, and burned more than $93 million in negative free cash flow.
The trade could still work out if President Trump's inflation of defense spending results in large contract awards to Kratos. If the company fails to win significant contracts, however... look out below.
