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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.
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.
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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.
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.
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