Why Kratos Defense & Security Stock Is Up Today

Key Points

• The U.S. government is moving to streamline drone export rules, potentially creating new opportunities for Kratos to sell to allies.

• Kratos shares have been on a roll this year, but for risk-tolerant, long-term focused investors there are still opportunities from here.

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

The U.S. government is moving to make it easier for Kratos Defense & Security Solutions (NASDAQ: KTOS) and other drone manufacturers to export their goods to foreign allies. Kratos shares are rallying on the news, up 7.7% at the close of Tuesday trading.

Images source: Kratos Defense & Security.

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A new reason for optimism

Kratos is a defense electronics and drone manufacturer that is angling to have a large role in a pilotless future. The company's Valkyrie "loyal wingman" drone is designed to fly alongside piloted F-35s into battle, providing extra firepower without putting additional human lives at risk.

Kratos shares have been gaining altitude this year on signs that the Pentagon is warming to the idea of adding the Valkyrie to its fleet. Late Monday, the company's chances to sell into other markets got a boost.

The Department of State said it would review requests to export unmanned aerial systems (UAS) similar to how it reviews requests to export piloted aircraft, and not as missile systems. The move, according to the official release, means "the Department will be able to more efficiently adjudicate foreign defense sales requests, opening new markets for the U.S. UAS industry."

Although Kratos is not the only defense stock that could benefit from the change, the company's prominence among drone makers caused its shares to get an extra boost from the news.

Is Kratos Defense stock a buy?

Kratos shares are now up nearly 200% year to date. That sort of growth is unsustainable, but there is a case to be made that the company can grow from here.

The Valkyrie is still in its early stages in the U.S., and a full production contract, should one materialize, would provide a big boost to revenue and help justify the valuation. The potential for easier access to international markets is an added bonus, providing Kratos with more ways to win.

Investors should be aware that if history is a guide, Kratos shares will be volatile. And there is a risk that the rally will collapse if all these anticipated sales don't materialize. But for those wanting to add a more speculative growth stock to a well-diversified portfolio, Kratos remains an intriguing option even after its rise.

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Lou Whiteman has positions in Kratos Defense & Security Solutions. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.