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Kratos' unmanned aircraft are in high demand.
The defense contractor's growth investments are weighing on its profits.
Management sees a generational growth opportunity ahead.
Shares of Kratos Defense & Security Solutions (NASDAQ: KTOS) declined by 14% on Wednesday after the drone maker's earnings projections fell short of Wall Street's expectations.
The XQ-58 Valkyrie. Image source: Kratos Defense & Security Solutions.
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Kratos' third-quarter revenue climbed by 26% year over year to $347.6 million. The gains were driven by a 36% jump in unmanned systems revenue to $87.2 million, and a 23% increase in government solutions revenue to $260.4 million.
"Our Q3 financial results are representative of the increasing demand for Kratos' military grade hardware, systems, and software to support U.S. National Security and its allies," CEO Eric DeMarco said in a press release.
Kratos is seeing strong interest in its uncrewed tactical aircraft, such as the XQ-58 Valkyrie. The drone producer is investing aggressively in new facilities and equipment to meet this demand.
"We continue to be presented with new multi-year/decade billion-dollar potential opportunities, certain of which we plan on pursuing, assuming the business case and expected rate of return on Kratos capital invested is acceptable," DeMarco said.
These investments are weighing on Kratos' near-term profitability, and the defense company's fourth-quarter adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) forecast of $29 million to $34 million was a bit lower than analysts' estimates.
Still, Kratos raised its 2026 organic revenue growth guidance to 15% to 20%, up from a previous forecast of 13% to 15%. Management also issued a preliminary organic revenue growth target for 2027 of 18% to 23%. Additionally, the company anticipates that its adjusted EBITDA margin will rise in both years as it scales its operations.
To further bolster its expansion prospects in the coming years, Kratos announced that it has struck a deal to acquire Orbit Technologies for $356.3 million. Orbit provides satellite-based communication systems for uncrewed vehicles.
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Joe Tenebruso 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.
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