"At a valuation north of 360 times earnings, and with cash still burning, I see no compelling reason to own Kratos stock today."
That basically summed up my thinking last week on Kratos Defense & Security (KTOS 2.40%), after reporting a pro forma earnings beat -- but GAAP earnings less than half its pro forma income.
This morning, investment banker Jefferies disagreed with my take, reiterating a "buy" rating on Kratos. But even Jefferies is starting to have second thoughts about this defense stock, and it is lowering its price target by $5 to $80 a share.
Kratos stock is down 3.2% as of 9:50 a.m. ET.
Image source: Getty Images.
Kratos Q1 earnings
Kratos grew sales 23% year over year in Q1 and doubled its reported GAAP income, but free cash flow was negative $47.3 million, as Kratos continues to burn cash. Despite this quibble, Jefferies called the company's Q1 report "solid" in a report covered on TheFly.com on Sunday.
As drones gain greater prominence in conflicts in both Ukraine and Iran, Kratos's order book is booming. With orders coming in the door faster than Kratos can fulfill them, the company's book-to-bill ratio grew to 1.6 in Q1, foreshadowing further sales growth ahead.
NASDAQ: KTOS
Key Data Points
What's next for Kratos
So, will Kratos stock go up or will Kratos stock go down? No one really knows, but it's perhaps instructive that out of the six analysts who changed their price targets on Kratos Thursday, the day after earnings, only one raised its price target, and five lowered their price targets.
Now Jefferies makes that six-to-one.
Even though the stock looks a bit cheaper today (at 340 times earnings), I still think it's too expensive to buy.
