Kratos Defense Gains 59.8% in the Past 3 Months: How to Play the Stock?

Shares of Kratos Defense & Security Solutions, Inc. KTOS have gained 59.8% in the past three months compared with the 2.4% growth of the Zacks Aerospace-Defense Equipment industry. It also outperformed the Zacks Aerospace sector’s growth of 4.6% and the S&P 500’s rise of 9.4%.

Other defense equipment stocks, such as AAR Corporation AIR and Rocket Lab USA, Inc. RKLB, have also outperformed the industry in the past three months. Shares of AIR have gained 8.4%, while shares of RKLB have gained 71.9%.

With KTOS showing strong performance in the stock market, some investors may feel tempted to buy the stock immediately. Yet, it is important to first understand the factors driving this price performance. The key question is whether the company can sustain this momentum or if there are risks that could limit its future growth. The idea is to help investors make a more insightful decision.

What Pushed KTOS Stock Up?

Kratos Defense’s share gains over the past three months appear to be driven by strong quarterly results, new program developments and strategic collaborations.

In July 2025, the company signed a partnership with Airbus to equip the Valkyrie with Airbus' mission systems for the German Air Force, marking a key step in expanding its global presence. Alongside this, U.S. defense contracts, upcoming programs like Air Wolf, Athena and a new fifth-generation jet drone reinforce Kratos Defense’s leadership in advanced UAS solutions. These efforts position the company to capitalize on long-term growth opportunities as global defense agencies increase their investments in next-generation unmanned systems.

The company has also been expanding its footprint and operational capabilities. In June, Kratos Defense announced plans to establish a new advanced manufacturing facility in Bristow, OK, to produce its GEK turbojet engine family, beginning with the GEK800. This move bolsters its role in defense and aerospace propulsion at a time when demand is rising.

What Lies Ahead for KTOS Stock?

Kratos Defense appears well-positioned for sustained long-term growth, backed by its broad portfolio in unmanned systems, hypersonics and propulsion. The company is expanding its drone programs with models such as Air Wolf, Athena, Thanatos and Apollo, complementing its established Valkyrie systems. Notably, Kratos Defense anticipates securing a sole-source contract for the Air Wolf tactical jet drone by the end of 2025, with potential production beginning in late 2026.

In the hypersonic space, Kratos Defense is advancing systems like Erinyes, Dark Fury and Icarus. The launch of its $50 million Hypersonic System Indiana Payload Integration Facility in March 2025 is expected to enhance production capacity for key programs, including MACH-TB.

The company is also working with GE Aerospace to develop cost-efficient jet engines for unmanned aerial systems, further strengthening its propulsion expertise. With a $1.41 billion backlog and clear delivery schedules over the next two years, Kratos Defense is well-positioned to generate consistent revenues and capture growing demand in defense and aerospace markets.

Challenges For KTOS

While growth prospects remain strong, Kratos Defense also faces certain challenges. Supply-chain disruptions, particularly shortages of raw materials, continue to affect the broader defense industry and may impact the company’s operations. Rising inflation and labor shortages could further pressure profit margins and delay project timelines.

KTOS’ Near-Term Estimates

The Zacks Consensus Estimate for KTOS’ 2025 revenues indicates a solid improvement of 15.7% from the prior-year level. The estimate for its earnings also indicates an improvement of 4.1% from the prior-year level.

The Zacks Consensus Estimate for KTOS’ 2026 revenues indicates year-over-year growth of 17%. The estimate for its earnings also indicates year-over-year growth of 39.2%.

KTOS Shares Trading at a Discount

KTOS shares are trading at a discount, with its forward 12-month Price/Sales (P/S F12M) being 7.43X compared with its industry’s average of 9.48X.

Its industry peer, AIR, is trading at a discount in comparison with KTOS. AIR is trading at a P/S F12M of 0.91X, while RKLB is trading at a P/S F12M of 29.00X.

KTOS’ ROE

Return on Equity (ROE) measures how effectively a company uses shareholders’ equity to generate profits. KTOS currently has an ROE of 4.83, which is below the industry average of 8.56. This indicates that, compared with its industry, the company is generating lower returns on its equity.

Conclusion

Kratos Defense is well-positioned for long-term growth, supported by its expanding drone portfolio, strategic partnerships like the July 2025 Airbus Valkyrie agreement, advancements in hypersonics and propulsion, and a $1.41 billion backlog. Improving revenue and earnings estimates for 2025 and 2026 highlight the company’s operational momentum and strong presence in the U.S. and global defense markets.

At the same time, KTOS faces challenges such as supply-chain constraints, inflationary pressures and labor shortages, along with a dismal ROE.

Investors interested in the stock may consider waiting for a better entry point, while current shareholders can continue holding their positions and monitor ongoing developments.

KTOS currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

This article originally published on Zacks Investment Research (zacks.com).

Zacks Investment Research