Why Kratos Defense Stock Popped Today

Key Points

• Kratos Defense beat on both sales and earnings last night.

• GAAP profits were $0.02 per share, and Kratos expects to remain GAAP profitable through year end.

• Free cash flow, however, is negative, and sales growth may be slowing.

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

Mid-cap defense stock and military drone specialist Kratos Defense & Security Solutions (NASDAQ: KTOS) soared 9.4% through 11:50 a.m. ET Friday after the company reported a substantial earnings beat last night.

Heading into the report, analysts forecast Kratos would earn $0.09 per share on sales of $305.8 million, but Kratos reported an $0.11-per-share profit and sales of $351.5 million.

Where to invest $1,000 right now? Our analyst team just revealed what they believe are the 10 best stocks to buy right now. Learn More »

Image source: Getty Images.

Kratos Defense Q2 earnings

Kratos' sales grew 17% in Q2, 15% of which was organic growth, a tremendous accomplishment -- although management said its book-to-bill ratio in Q2 was only 0.7, so business could be slowing down.

Not all the news was good, however. On profits, it's worth noting that the $0.11 profit Kratos earned was a non-GAAP (adjusted) number, and that actual earnings as calculated according to generally accepted accounting principles (GAAP) amounted to only $0.02 per share -- down 60% year over year.

Free cash flow in the quarter also ran negative, with Kratos burning through $31.1 million in Q2.

Is Kratos stock a buy?

As implied by the weak book-to-bill ratio, Kratos guided below analyst estimates for Q3 revenue, just $315 million to $325 million. The Q2 revenue beat, however, more than makes up for that shortfall, and guidance for the full year is slightly ahead of Wall Street forecasts, with Kratos likely to generate sales of roughly $1.3 billion through the end of this year.

The company also expects to be profitable, at least on an operating basis, but also to continue burning cash through year end. Indeed, analysts who follow the company don't expect to see positive free cash flow before 2027.

Between the negative free cash flow and the lofty valuation -- more than 400 times this year's estimated earnings -- Kratos stock remains a sell for me.

Should you invest $1,000 in Kratos Defense & Security Solutions right now?

Before you buy stock in Kratos Defense & Security Solutions, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Kratos Defense & Security Solutions wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Netflix made this list on December 17, 2004... if you invested $1,000 at the time of our recommendation, you’d have $636,563!* Or when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $1,108,033!*

Now, it’s worth noting Stock Advisor’s total average return is 1,047% — a market-crushing outperformance compared to 181% for the S&P 500. Don’t miss out on the latest top 10 list, available when you join Stock Advisor.

See the 10 stocks »

*Stock Advisor returns as of August 4, 2025

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.