Kratos Defense is solidly positioned for accelerating top-line growth in this constrained fiscal backdrop since it focuses on developing affordable systems using existing, leading-edge technologies, amid a generational recapitalization of strategic weapons systems as global threats increase. The company expects to receive a critical Valkyrie tactical-drone contract in late 2024 or early 2025 and has several upcoming efforts across its portfolio, including microwave electronics, turbine technologies, small jet engines, tactical drones and hypersonic systems, that could boost revenue and profit.
– The company continues to capture Tactical drone opportunities, and with the elevated tension in Israel and Iran it is highly likely that the company will boost its sales above consensus.
– In addition, Kratos base business in Satellite Communications and Target drones is performing well and should see continued growth.
– The microwave components segment is the catalyst here, Israel segment is sucking on the first 5 killstreaks from Call of Duty (UAE / Counter UAV / Cruise Missiles)
Financials:
Q2 Key takeaways:
- Total Revenue Could Increase 8% to $279 Million; Guidance Targets $265-$280 Million
- Adjusted Ebitda Might Flatten to $22 Million on a 60-Bp Margin Contraction to 7.8%
- Government Solutions Revenue May Gain 6% to $217 Million; Ebit Margin Might Contract 80 Bps to 5%
- Unmanned Systems Revenue Could Climb 18% to $62 Million; Ebit Margin May Be Slightly Positive at 1.5%
Earnings:
They have killed it last earning with solid demand across its portfolio and better Government Solutions profitability drove 1Q results above consensus and guidance, with trends seen persisting. Still, it reaffirmed 2024 sales and Ebitda forecasts, given an abbreviated US fiscal year, suggesting potential 2H upside. Government Solutions sales rose 19%. The company’s Israeli-based microwave-electronics business is running on all cylinders, with growth accelerating from new and increased follow-on orders to support missile, radar and air-defense systems. The engine business is running hot as its low-cost options resonate with suppliers of drone, missile and loitering munitions.
Supply Chain:
Open Interest:
5:1 Call/Put ratio and 9% implied up move in the price post earnings.
Risks:
Downside risks is execution risk and the potential for a larger competitor to catch up to Kratos lead in the tactical drone market. There is a potential for cash flow generation to move to the right as the company invests in growth opportunities. Upside risks include tactical drone task orders that exceed expectations and a wider adoption of Kratos offerings by the DoD and international customer.