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President Trump wants a $1.5 trillion defense budget.
He also wants defense companies to invest more in weapons production, at the expense of profit margins.
President Trump announced Wednesday he wants to spend $1.5 trillion on defense:
"For the Good of our Country ... our Military Budget for the year 2027 should not be $1 Trillion Dollars, rather $1.5 Trillion Dollars ... This will allow us to build the 'Dream Military' that we have long been entitled to, and, more importantly, that will keep us SAFE and SECURE."
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Defense stocks in general are surging, and Kratos Defense & Security (NASDAQ: KTOS) stock in particular rocketed 17.7% through 11:05 a.m. ET.
Image source: Kratos Defense.
The President didn't say where he wants to spend the $1.5 trillion, or which companies will receive it. One thing's crystal clear:
Assuming Congress approves, once Kratos and its peers get the government money, they must invest it to improve their weapons, accelerate production, and improve maintenance -- not just hand it to executives in the form of fatter paychecks, or funnel it to shareholders via dividends and stock buybacks.
In a separate post, President Trump blasted defense companies for paying "exorbitant and unjustifiable" executive compensation, insisting defense CEOs shouldn't earn more than $5 million per year. He also promised to ban "Dividends or Stock Buybacks for Defense Companies" until they've addressed his complaints.
This could turn out to be a double-edged sword for Kratos. On the one hand, Kratos is already experiencing strong revenue growth, with an average annual increase of 12% over the last five years. A $1.5 trillion defense budget could turbocharge that growth.
On the other hand, if Kratos must spend the extra money on capital investments, this will depress profit margins. Kratos only finally turned profitable in 2024. If it must now pour more funds into capex, those profits could vanish -- even with the extra revenue.
Caveat investor.
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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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