Has Kratos Stock Run Too Far After Its 193% Rally in 2024?

If you have been tracking Kratos Defense & Security Solutions lately, you are probably asking yourself the same thing many investors are right now: is this stock truly worth its price, or is there an opportunity being overlooked? With its shares closing at $66.71 recently, Kratos has grabbed market attention after an undeniably impressive run. Just look at the numbers: up almost 153% year to date, and a staggering 193% gain over the last year. That’s more than what you see in most defense stocks, and it signals more than just passing investor interest.

What’s driving all of this? Part of the rally owes to growing interest in the defense technology sector broadly, especially as global geopolitical tensions continue to create fresh demand for innovative security solutions. Kratos’ reputation for cutting-edge autonomous systems and defense electronics hasn’t hurt either. Still, these big moves inevitably attract questions about whether the stock’s price has gotten ahead of itself, or if there’s more room for growth.

Now, if you are wondering how Kratos stacks up on valuation, here’s a key data point: the company scores a 0 out of 6 on recent undervaluation checks. In other words, none of the standard methods currently indicate it’s undervalued. That doesn’t necessarily mean it’s overpriced, but it does tell us that a closer look at valuation is essential before making any investment decisions.

Let’s dive into how different valuation approaches measure up for Kratos. Keep reading, because we will end with a way to think about value that goes far beyond traditional metrics.

Kratos Defense & Security Solutions delivered 193.0% returns over the last year. See how this stacks up to the rest of the Aerospace & Defense industry.

Approach 1: Kratos Defense & Security Solutions Cash Flows

The Discounted Cash Flow (DCF) model estimates a company’s intrinsic value by projecting its future cash flows and discounting them back to today’s value. This approach considers both what the business generates now and what it could produce for shareholders over time.

For Kratos Defense & Security Solutions, the latest twelve months’ Free Cash Flow is negative, at -$54.22 million. Analysts expect a sharp turnaround, projecting annual increases that would bring FCF up to $41.38 million by 2035. By 2027, forecasts already see cash flow swinging positive to $13.18 million. These projections suggest strong improvements ahead, but they start from a loss-making position today.

After tallying these estimates and discounting them, the DCF model values Kratos at only $3.23 per share. With the current market price at $66.71, this means the stock trades at a substantial premium, approximately 1966.2% over its DCF-based fair value. In other words, the DCF model indicates the stock is significantly overvalued at the moment.

Result: OVERVALUED

Our DCF analysis suggests Kratos Defense & Security Solutions may be overvalued by 1966.2%. Find undervalued stocks based on DCF analysis or create your own screener to find better value opportunities.

Approach 2: Kratos Defense & Security Solutions Price vs Sales

The Price-to-Sales (P/S) ratio is a useful metric for companies like Kratos Defense & Security Solutions, especially where profits may be slim or volatile but sales remain a strong indicator of potential. For growing companies in innovative or rapidly expanding sectors such as defense technology, the P/S ratio can provide a clearer sense of market expectations than earnings-based multiples, as it smooths out periods of low or negative profit and focuses on the core business activity: generating revenue.

Growth expectations and risk both play important roles in determining what a "normal" or "fair" sales multiple should be. Firms expected to deliver high revenue growth or disrupt their industry often trade at higher P/S ratios, while those with greater risk or lower growth usually see their ratios fall closer to the industry norm.

Currently, Kratos trades at a P/S ratio of 9.28x. This stands out against the wider Aerospace & Defense industry average of 3.20x and the peer average of 2.68x. Simply Wall St's Fair Ratio, which incorporates factors like Kratos' future growth, margins, and sector risk, arrives at a value of 2.29x, which is substantially below the current valuation. In simple terms, the market is pricing Kratos at a much higher level than what would be justified by these fundamentals, suggesting the stock is priced aggressively relative to its sales outlook.

Result: OVERVALUED

PS ratios tell one story, but what if the real opportunity lies elsewhere? Discover companies where insiders are betting big on explosive growth.

Upgrade Your Decision Making: Choose your Kratos Defense & Security Solutions Narrative

Beyond traditional valuation metrics, Narratives offer a smarter and more dynamic way to invest by connecting your view of a company's future to its fair value. This approach essentially lets you tell the story behind the numbers.

A Narrative is simply your perspective on a company’s prospects. It incorporates what you believe about future revenue, earnings, and margins, and then directly links that story to a financial forecast and a fair value calculation.

Narratives are easy to use on the Simply Wall St platform, where a vibrant community of millions of investors can create, share, and update their outlooks as new information such as earnings or news becomes available.

This approach empowers you to make timely buy or sell decisions by clearly comparing your Narrative’s fair value to the current share price, so you can quickly see if the market aligns with your view.

For Kratos Defense & Security Solutions, you might see Narratives ranging from very bullish (believing its focus on unmanned systems will drive revenue and justify a fair value as high as $80 per share), to more cautious (concerned about execution and assigning a fair value closer to $60), all based on each investor’s assumptions and expectations.

Do you think there's more to the story for Kratos Defense & Security Solutions? Create your own Narrative to let the Community know!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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