Missile Defense Demand And Golden Dome Initiative Will Support Steady Long Term Performance

Catalysts

About Karman Holdings

Karman Holdings is a merchant supplier of IP rich space and defense hardware serving missile defense, hypersonics, space launch and tactical systems for prime contractors and government customers.

What are the underlying business or industry changes driving this perspective?

• Although multi year missile production increases and large U.S. Army award frameworks support sustained demand for systems Karman supplies, any moderation in Pentagon plans to double or quadruple output on programs like THAAD, Standard Missile 6 and GMLRS could slow the projected 20% to 25% growth trajectory and temper revenue expansion.
• Although the Golden Dome initiative and related space based intercept and sensor architectures point to structurally higher demand for Karman's qualified content, delays in converting early stage meetings and industry days into firm RFQs and purchase orders could push out the timing of new program ramps and compress near term earnings growth.
• Despite record funded backlog that currently provides full visibility to the midpoint of 2025 guidance and supports line of sight into 2026, the multiyear nature of these contracts means any shift in defense funding priorities or extended government shutdowns could defer shipments and impact revenue recognition and net income timing.
• While capacity investments, such as doubling forging throughput in Albany and integrating MTI, ISP and Five Axis, should enhance Karman's ability to support higher launch cadence and advanced missile programs, integration complexity and execution risk could limit expected operating leverage and constrain EBITDA margin expansion beyond the targeted 50 basis points per year.
• Although a healthy pipeline of off market, IP rich tuck in acquisitions can broaden capabilities in hypersonics and commercial launch hardware, rising leverage and the challenge of maintaining discipline on deal multiples could dilute accretion and weigh on future earnings per share if acquired assets underperform expectations.

Assumptions

This narrative explores a more pessimistic perspective on Karman Holdings compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Karman Holdings's revenue will grow by 22.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 2.6% today to 14.0% in 3 years time.
• The bearish analysts expect earnings to reach $111.0 million (and earnings per share of $0.82) by about December 2028, up from $11.3 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $187.8 million.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 104.4x on those 2028 earnings, down from 785.2x today. This future PE is greater than the current PE for the US Aerospace & Defense industry at 36.7x.
• The bearish analysts expect the number of shares outstanding to grow by 0.11% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.63%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Sustained multiyear growth in national security spending on missile defense, hypersonics, unmanned systems and the Golden Dome initiative, combined with Karman's record $758 million funded backlog and expectation of 20% to 25% annual revenue growth beyond 2025, could drive revenue and earnings materially higher than implied by a flat share price outlook and could pressure valuation upward through stronger top line and expanding net income.
• The company's strategy of aggregating scarce, IP rich space and defense assets, as evidenced by the MTI, ISP and Five Axis acquisitions and a still healthy M&A pipeline, may deepen Karman's competitive moat and increase operating leverage over time. This may support higher EBITDA margins and earnings growth that are inconsistent with a share price that remains unchanged.
• Secular expansion of the space launch market, with increasing cadence across multiple providers and Karman's single source roles on critical exotic alloy components, could structurally increase demand for its content. This could lead to faster than expected revenue growth and margin resilience that would likely support a higher valuation over the long term.
• Ongoing capacity and productivity investments, such as doubling forging capacity in Albany and integrating newly acquired facilities, may unlock additional throughput and quality improvements. This could result in margin expansion above the 50 basis points per year target and could drive stronger EBITDA and net income growth than a flat share price would imply.
• If federal procurement streamlining efforts and Golden Dome related program awards move from industry days and early discussions to firm RFQs and purchase orders faster than expected, Karman could see an acceleration of backlog conversion and new program ramps. This could boost revenue visibility and earnings trajectories beyond current expectations and could challenge the assumption that the share price will stay about the same.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Karman Holdings is $70.0, which represents up to two standard deviations below the consensus price target of $83.8. This valuation is based on what can be assumed as the expectations of Karman Holdings's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $100.0, and the most bearish reporting a price target of just $70.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be $792.0 million, earnings will come to $111.0 million, and it would be trading on a PE ratio of 104.4x, assuming you use a discount rate of 7.6%.
  
• Given the current share price of $67.27, the analyst price target of $70.0 is 3.9% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.