Why Kratos Defense & Security Solutions Stock Popped Friday

KTOS +5.59%

Key Points

• KeyBanc analyst Michael Leshock initiated coverage on Kratos stock with a buy rating today.

• Leshock sees Kratos as a strong investment based on its exposure to high-growth Pentagon projects.

• 10 stocks we like better than Kratos Defense & Security Solutions ›

Military drones manufacturer Kratos Defense & Security Solutions (NASDAQ: KTOS) stock gained 4.5% through 1:30 p.m. ET Friday.

You can thank KeyBanc analyst Michael Leshock for that. This morning, Leshock initiated coverage on Kratos with an overweight rating and a $90 price target.

Why KeyBank loves Kratos stock

In today's note, Leshock cites Kratos's "high-growth exposure" to military initiatives, including Golden Dome, hypersonic missiles and aircraft, and "collaborative combat aircraft," also known as CCA or "loyal wingmen" -- drones that fly alongside and are controlled by piloted fighter jets -- as primary reasons to own Kratos stock.

Kratos has a history as a provider of "proven rapid, low-cost development" drone products, primarily in the field of unmanned aircraft and missiles used for target practice, explains the analyst, and is well-positioned to benefit from increased defense spending both at home and abroad. In CCA, in particular, the company's XQ-58A Valkyrie loyal wingman drone is often compared to similar offerings from privately owned military contractors, General Atomics and Anduril Industries, as strong contenders for future production contracts.

Is Kratos stock a buy?

From a valuation perspective, Leshock argues Kratos stock is a buy based on an "8.5x blended 2026E/2027E P/S vs. 1–5x historical range" -- which sounds a little strange to me. If Kratos "historically" sells for between one and five times sales (and I agree that a price-to-sales ratio of one, at least, is an appropriate valuation for defense stocks), then it stands to reason 8.5 times sales is too much to pay -- and thus a very aggressive price target for Kratos stock.

Consider too that Kratos currently costs closer to nine times trailing sales, and the argument that this stock is a "buy" just doesn't hold water for me. Kratos stock, I fear, is a sell.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Kratos Defense & Security Solutions. The Motley Fool has a disclosure policy.

Why Kratos Defense & Security Solutions Stock Popped Friday was originally published by The Motley Fool