Rising Global Defense Spending Will Expand Unmanned Aerial Systems

Key Takeaways

• Accelerating demand for affordable, production-ready unmanned and space defense technologies positions Kratos as a key supplier with scalable, high-margin growth prospects.
  
• Favorable shifts toward agile procurement and operational systems give Kratos competitive advantages, enhancing recurring revenue and long-term margin quality through strategic partnerships and market focus.
  
• Heavy reliance on US government defense contracts, high R&D costs, margin compression, limited global diversification, and commercial space market weakness threaten future growth and profitability.

Catalysts

A technology company, provides technology, products, and system and software for the defense, national security, and commercial markets in the United States, other North America, the Asia Pacific, the Middle East, Europe, and Internationally.

• Substantial global increases in defense spending and large new US and allied program budgets—along with greater urgency for fielding affordable, operational defense hardware amid ongoing geopolitical instability—are resulting in a record $12.6 billion opportunity pipeline, robust bookings (1.2 times book-to-bill) and the prospect of sustained year-over-year organic revenue growth in the range of 10 to 15 percent over the next two years.
  
• Rapidly accelerating adoption and fielding of unmanned and autonomous defense systems, driven by demand for affordable tactical drones, hypersonic vehicles, and air defense/counter-UAS platforms, is positioning Kratos as a key supplier with operational, in-production offerings, fueling future top-line growth and improved order visibility.
  
• Kratos’ expansion and investments in proprietary, low-cost engine, propulsion and hypersonic technologies—combined with successful partnerships (notably with General Electric and RAFAEL) and the company’s unique position as a “go-to” source for these emerging program needs—are expected to result in significant revenue ramp and structurally higher gross and EBITDA margins as high-margin products scale.
  
• The shift among governments and primes toward buying cost-effective systems that are already operational and production-ready, rather than funding lengthy new R&D, puts Kratos’ current product lineup and U.S.-centric supply chain at a competitive advantage, accelerating contract wins and enabling faster revenue and earnings recognition, especially as defense customers move to agile procurement models.
  
• Growing demand for advanced satellite ground systems, secure communications, and microwave electronics—driven by new space-based defense initiatives such as Golden Dome and global satellite deployments—are supporting contract wins with recurring revenue potential, setting the stage for higher segment margins and improved long-term earnings quality as national security space investments ramp through 2026 and beyond.

Kratos Defense & Security Solutions Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Kratos Defense & Security Solutions compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Kratos Defense & Security Solutions's revenue will grow by 23.8% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 1.7% today to 5.5% in 3 years time.
• The bullish analysts expect earnings to reach $122.1 million (and earnings per share of $0.71) by about July 2028, up from $19.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 124.0x on those 2028 earnings, down from 478.5x today. This future PE is greater than the current PE for the US Aerospace & Defense industry at 35.1x.
• Analysts expect the number of shares outstanding to grow by 1.62% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.12%, as per the Simply Wall St company report.

Kratos Defense & Security Solutions Future Earnings Per Share Growth

Risks

• A heavy reliance on US government contracts, with 68 percent of Q1 2025 revenue coming from US federal sources, makes Kratos vulnerable to changes in defense budgets that could result from rising geopolitical cooperation or greater public focus on domestic social priorities, potentially leading to sharp volatility and downside risk in future revenue and cash flows.
  
• Kratos’ significant investment in hypersonics, tactical drones, and manufacturing capacity involves high upfront costs and assumes sustained demand and limited competition, yet rapid advances in AI, autonomy, and disruptive defense technologies could make current platforms obsolete, requiring Kratos to incur further high R&D and capital expenditures that erode net margins and theoretical earnings growth.
  
• Fixed-price multi-year contracts bid and won before the current inflationary environment, particularly in the Unmanned Systems division, are resulting in margin compression as Kratos absorbs increased material and labor costs without the ability to recover them promptly, creating ongoing risk to net profitability and overall earnings quality until contract renegotiations in 2027–2028.
  
• Although international opportunities are highlighted, Kratos’ exposure to protectionist regulations and national security barriers in foreign military sales, as well as reliance on programs with Israeli partners, presents obstacles to global diversification; regional conflicts, shifting export controls, or diplomatic changes could restrict market access and limit revenue growth from international customers over the long term.
  
• Kratos’ commercial satellite and space-related business continues to suffer from macro industry headwinds, especially delays and uncertainties around large geosynchronous software-defined satellite launches by customers like Airbus, Thales, and Boeing; if the commercial segment remains weak while defense budgets soften, the company’s aggregate revenue and margin expansion could stall, affecting both top-line growth and operating leverage.

Valuation

• The assumed bullish price target for Kratos Defense & Security Solutions is $70.0, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Kratos Defense & Security Solutions's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $70.0, and the most bearish reporting a price target of just $37.0.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $2.2 billion, earnings will come to $122.1 million, and it would be trading on a PE ratio of 124.0x, assuming you use a discount rate of 7.1%.
• Given the current share price of $55.42, the bullish analyst price target of $70.0 is 20.8% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.