Aerospace Modernization And Drone Demand Will Fuel Long-Term Upside Momentum

Key Takeaways

• Kratos is capitalizing on global defense modernization, with strong contract momentum, first-mover advantage in unmanned systems, and increased demand for proprietary technologies.
  
• Investments in production capacity and strategic partnerships are driving revenue visibility, higher margins, and long-term earnings growth across diverse defense platforms.
  
• Aggressive investment, supplier reliance, concentrated government exposure, and heavy spending threaten Kratos' margins, cash flow, and earnings predictability despite recent operational momentum.

Catalysts

A technology company, provides technology, products, and system and software for the defense, national security, and commercial markets in the United States, other North America, the Asia Pacific, the Middle East, Europe, and Internationally.

• Kratos is well positioned to benefit from a historic surge in global defense spending and modernization initiatives by the U.S., NATO, and Pacific allies, as ongoing geopolitical tensions drive a multi-year expansion in defense budgets. This widespread increase in procurement is creating robust demand for Kratos' technologies and supporting high contract win rates, which should continue to drive strong top-line (revenue) growth and sustained backlog momentum.
  
• The U.S. government and legislative reforms (e.g., Executive Orders, FORGED Act, SPEED Act) are streamlining defense procurement to prioritize rapid adoption of next-generation technologies like unmanned systems, drones, hypersonic, and satellite communications-areas where Kratos has first-mover advantage and proven products. This is expected to accelerate contract awards and shorten time-to-revenue cycles, allowing Kratos to pull forward significant revenues and improve working capital efficiency.
  
• Kratos' early investments in serial production of tactical drones (e.g., Valkyrie) and rapid scaling in missile propulsion and microelectronics put it ahead of competitors as demand for unmanned and autonomous solutions escalates globally. With sole-source and first-to-market positions, Kratos is poised for significant incremental revenue and higher-margin growth as large contracts come online, particularly as international orders (with premium margins) ramp up.
  
• Multi-domain modernization (integrated land, sea, air, space, and cyber operations) underpins recurring demand for flexible, software-defined, and integrated platforms such as those in Kratos' OpenSpace, satellite communications, and hypersonic franchises. This diversification positions Kratos for increased earnings stability, margin expansion, and long-term EPS growth, as higher-value, proprietary solutions take a larger share of the product mix.
  
• Strategic wins on generational programs (e.g., Poseidon, MACH-TB, Prometheus, GEK), ongoing facility expansions, and deepening partnerships-with primes and government agencies-are creating a strong multi-year visibility into revenue and cash flow growth. As these large-scale awards transition into full-rate production, Kratos is set to leverage operational scale for improved net margin, increasing the company's earnings power and long-term intrinsic value.

Kratos Defense & Security Solutions Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Kratos Defense & Security Solutions's revenue will grow by 17.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.2% today to 5.2% in 3 years time.
• Analysts expect earnings to reach $101.6 million (and earnings per share of $0.62) by about September 2028, up from $14.5 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $123.8 million in earnings, and the most bearish expecting $60.4 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 180.1x on those 2028 earnings, down from 751.5x today. This future PE is greater than the current PE for the US Aerospace & Defense industry at 34.4x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.65%, as per the Simply Wall St company report.

Kratos Defense & Security Solutions Future Earnings Per Share Growth

Risks

• Kratos' aggressive internal investment in new production and facility expansion ahead of secured contract awards-especially for tactical drones like Valkyrie-creates significant working capital and CapEx requirements, which may pressure free cash flow and expose the company to downside risk if contract awards are delayed or fail to materialize, negatively impacting net margins and earnings.
  
• Ongoing dependence on a small number of sole
• or limited-source suppliers for critical subsystems exposes Kratos to cost escalation and potential supply chain disruptions-particularly since a handful have "keys to the kingdom" and can demand higher prices-thereby compressing gross margins and increasing production risk, which could delay deliveries and revenue recognition.
  
• Heavy reliance on U.S. Department of Defense and allied government spending, with 71% of Q2 revenue from government sources, creates vulnerability to shifts in budget priorities, procurement delays, or geopolitical policy changes, any of which could result in revenue volatility and uneven earnings growth over the long term.
  
• The business model requires ongoing elevated R&D and capital expenditures to maintain technology leadership in areas like hypersonics and unmanned systems, but successful commercialization is not guaranteed; as such, there is risk of diluted returns on invested capital and net margin compression if anticipated program ramps or sole-source positions do not scale as expected.
  
• Strong near-term performance is not fully translating into immediate cash flow generation, with continued use of cash for inventory build, working capital, and CapEx highlighted by negative free cash flow of $31.1 million in Q2 and expectations for further outlays in 2026–2027; this suggests Kratos may not become a material multiyear cash flow generator until late in the decade, posing a risk to near-term earnings and shareholder returns.

Valuation

• The analysts have a consensus price target of $71.214 for Kratos Defense & Security Solutions based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $80.0, and the most bearish reporting a price target of just $60.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.9 billion, earnings will come to $101.6 million, and it would be trading on a PE ratio of 180.1x, assuming you use a discount rate of 7.6%.
• Given the current share price of $64.56, the analyst price target of $71.21 is 9.3% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.