Kratos Defense & Security (KTOS +1.77%) stock jumped 5% through 11:50 a.m. ET Friday after KeyBanc analyst Michael Leshock published a bullish note on defense stocks in the context of aerial "conflict with Iran" that might or might not turn into "boots on the ground."
"As the first week of the Iran conflict draws to a close," writes Leshock, we're seeing increased use of military drones in the conflict, at the same time as the need to replenish expended munitions creates a new wave of demand for these novel weapon systems.
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What KeyBanc says about Iran and Kratos
Well and good. But KeyBanc then calls out Kratos as a beneficiary of this trend. In the (unlikely but possible) event of a ground invasion, the banker argues the U.S. will need more offensive and defensive drones (to protect against incoming drones and missiles), and says Kratos would "see incremental upside through platforms like Mighty Hornet IV."
In the more likely scenario the conflict remains an air war, and stretches out "four weeks, but it could be six, it could be eight," according to Secretary of Defense Pete Hegseth -- Kratos would also benefit. The company has "exposure to propulsion (SRMs and smaller engines) and next-gen strike priorities (hypersonics/ hypersonic-adjacent)," according to KeyBanc.
NASDAQ: KTOS
Key Data Points
Is Kratos stock a buy?
I don't buy either argument. Mighty Hornet is a jet-powered drone Kratos is building in cooperation with Taiwan. It only began testing last month, however, and won't enter mass production anytime soon. I doubt it will make any near-term contribution to Kratos's business.
Similarly with "hypersonics." The U.S. is testing hypersonics, but none have been fielded operationally. I see little prospect of hypersonics playing a role in the Iran conflict or contributing meaningfully to Kratos's sales for years.
