Kratos: Bargain-Priced Player In Space Economy, AI, Autonomous Systems Businesses
Summary
- Kratos is well-positioned to benefit from the hypergrowth of the space economy with the advent of Space 2.0.
- An established company with massive growth potential with a relatively cheap valuation.
- Likely M&A target for the giants in the aerospace and defense sector which dwarf it.
Our top pick for the space business is another company with ties to both the aerospace/defense sectors and the space business. Kratos Defense & Security Solutions (NASDAQ:KTOS) is well-positioned to benefit from the hypergrowth of the space economy with the advent of Space 2.0. The company is going into overdrive now and management has guided 11% revenue growth in 2021 while the consensus revenue growth from 2022 is 15% and for 2023 is 18%. When looking at the accelerating growth and the company’s current valuation reaches around 3x estimated sales for 2022, it is unbelievably cheap relative to many space companies. Indeed, ARK Invest’s space exploration ETF has made Kratos its third-largest holding with a weighting of 5.6% - just behind number one Trimble’s (TRMB) 8.3% and The 3D Printing (PRNT) ETF’s 6.1%. In short, Kratos is an established company with massive growth potential with a relatively cheap valuation.
Kratos has Wings
Kratos Defense & Security Solutions is a San Diego, California-based company that develops and manufactures unmanned systems, directed-energy weapons, cyber security/warfare, microwave electronics, missile defense, satellite communications, and training and combat systems. Its customers include the US government, state and local government agencies, allied and friendly foreign governments, and commercial enterprises. The company's main divisions are Defense and Rocket Support Services, Microwave Electronics, Modular Systems, Public Safety and Security, Technology and Training, and Unmanned Systems. Kratos works closely with innovators to create new technology-focused businesses in Silicon Valley as part of a Pentagon initiative. Kratos Defense and Solutions was founded as Wireless Facilities Inc. and focused primarily on building and supporting telecommunications infrastructure and networks. In 2004, the company shifted its focus to provide professional services to the US government, with a focus on the Department of Defense and with this shift acquired small and midsized firms in the Federal Service business. In 2007, the company’s name was changed to Kratos Defense & Security Solutions to emphasize the company’s new focus. In 2011, Kratos merged with space and terrestrial data service provider Integral Systems. In 2019, the company purchased Florida Turbine Technologies and in 2020 it purchased Technical Directions Inc., a maker of small turbojet engines, which the company uses for its own products and is also used to power customers' products such as the US AFRL’s Gray Wolf from Northrop Grumman (NOC).
The company has been winning a stream of contracts since Dec 2020 for its communications systems and defense systems. It is widely viewed as a technology supplier in the space business as well. Its current market cap is just over USD3bn, making it a likely M&A target for the giants in the aerospace and defense sector which dwarf it.
Rationale
Orders for Kratos’s solutions since Dec 2021 amounted to roughly USD154mbn and break down roughly into USD38.7mn from the US Navy for 48 BQM-177 Aerial Targets and associated technical data, USD37.7mn from the US Air Force for its Skyborg to “integrate, test, and deliver XQ-58A Valkyrie aircraft”, USD22mn order for communication and satellite systems, USD17.8 form the USAF to support its LCAAT for the XQ-58A Valkyrie; and USD11mn development contract to support a next-gen satellite program. While these contracts may appear modest at first glance when compared to the contracts landed by the giants such as Northrop Grumman, Raytheon (RTX), etc., for a small company like Kratos, which had USD202mn in 3Q20 revenue, it represents considerable growth. Kratos’ BS is very healthy, it ended 4Q20 with USD381.5mn in cash and USD301.0 in long-term debt. The average number of diluted shares rose to 118.7mn from 109.2mn YoY.
We believe Kratos is well-positioned to benefit from the hypergrowth of the space economy with the advent of Space 2.0. The company is going into overdrive now and management has guided 11% revenue growth in 2021. The consensus revenue growth from 2022 is 15% and for 2023 is 18%.
Looking at the accelerating growth, the company’s current valuation reaches around 3x estimated sales for 2022, which is unbelievably cheap relative to many space companies. Indeed, ARK Invest’s space exploration ETF has made Kratos its third-largest holding with a weighting of 5.6%. This is just behind number one Trimble’s 8.3% and The 3D Printing ETF’s 6.1%. Kratos is an established company with massive growth potential and a relatively cheap valuation. There is very little to dislike about the stock.
Target drones market worth USD6.3bn by 2025, CAGR of 7.6%
Source: Kratos, Hyundai Motor Securities
Droning on
The outlook for Kratos is very bright as the unmanned aircraft systems (UAS) market’s total market revenue was USD2bn in 2017 and according to reports is expected to reach USD4.5bn by 2023 with an estimated CAGR of 24.5% in the forecast period. The outlook for the unmanned aerial vehicles is even more promising as it is projected to show even higher revenues, with projections nearing 10x those for UAS. The UAV market, which was estimated at USD19.3bn in 2019 is projected to reach USD45.8bn by 2025, representing a CAGR of 15.5% from 2019-25. The rapid increase in the use of UAVs by militaries around the world is one of the main drivers behind the growth of the UAV market. In addition, the rising use of UAVs for commercial applications such as aerial remote sensing, monitoring, prevision agriculture, product delivery, and surveying and mapping is also driving the growth of the UAV market. Kratos operates in both of these segments, competing with Boeing (BA), Raytheon, and AeroVironment (AVAV).
Unmanned aerial target drone systems
Source: Kratos, Hyundai Motor Securities
Unmanned aerial tactical drone systems
Source: Kratos, Hyundai Motor Securities
Expanding autonomy
Kratos is not only building world-class autonomous UAVs and space systems but it is also a player in the autonomous vehicle market. Its M-PAK is used to quickly convert existing fleets of standard human-driven vehicles into “optionally-manned” vehicles that can be driven in either manned or unmanned modes. It is using its expertise to expand into other high-growth areas for the commercial sector. On Mar 29 the company announced that the American Society of Civil Engineers in its 2021 report Card for American called its Infrastructure Autonomous Truck-Mounted Attenuator (ATMA), a driverless version of mobile crash barriers an “infrastructure gamechanger”. This development heralds a potentially very promising future for Kratos with the planned rebuilding of American infrastructure and push to more autonomous technologies by businesses.
Specializes in areas where tech advances can have force multiplier effect
Source: Kratos, Hyundai Motor Securities
Spaced out
Kratos’s Space, Training, and Cybersecurity division provides its customers with satellite communications, cybersecurity, and solutions. It has been providing complete satellites and terrestrial ground segment solutions for satellites, signals, and networks. Its Cyber business addresses key cybersecurity challenges such as cloud security, continuous monitoring, IT security, and risk management. The company’s Training business uses instructional design and curriculum capabilities, simulations systems, and state-of-the-art technologies, to enhance warfighter readiness.
Strategic supplier of end-to-end ground systems ground operations systems
Source: Kratos, Hyundai Motor Securities
Azure Orbital – Kratos platform turns satellites, antennas into software-defined systems
Source: Kratos, Microsoft, Hyundai Motor Securities
Launch vehicle successfully launched experiment for US Space Force
Source: Kratos, Hyundai Motor Securities
Big potential for a small price
With a market cap of only USD3.37bn level and fast-growing opportunities in the unmanned systems market and space business, Kratos is bargain for not only investors but for other companies operating in the aerospace and defense sectors looking for a company positioned for rapid growth with strong technological capabilities. Its current valuation makes it an appealing M&A target for companies like Boeing (market cap of USD148.66bn), Northrop Grumman (market cap of USD53.96bn), Lockheed Martin (LMT) (market cap of USD103.5bn), and Raytheon (market cap of USD117.14bn). What also appears feasible is the potential for a small or midsized competitor to acquire it— companies such as Elbit Systems (ESLT) (market cap of USD6.32bn) and Textron (TXT) (market cap of USD12.73bn).
FY20 financial highlights
Source: Kratos, Hyundai Motor Securities
Kratos-growth trajectory
Source: Kratos Hyundai Motor Securities
The bottom line
We believe Kratos is well-positioned to benefit from the hypergrowth of the space economy with the advent of Space 2.0. While the company is not highly profitable, yet it is the massive potential which it offers at a discount that we find attractive. It has all the right technologies and is in the right markets at the start of the 21st century of space travel and exploration and autonomous systems. The company’s backlog is robust, and its BS is strong. The company is going into overdrive now and management has guided 11% revenue growth in 2021, and the consensus revenue growth for 2022 is 15% and for 2023 is 18%. The company’s current valuation reaches around 3x estimated sales for 2022, which is unbelievably cheap relative to many space companies. Indeed, ARK Invest’s space exploration ETF has made Kratos its third-largest holding with a weighting of 5.6%, behind number one Trimble’s 8.3% and The 3D Printing ETF. In short, Kratos is an established company, it has massive growth potential and a relatively cheap valuation. We have very little to dislike about the stock.
This article was written by
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Hyundai Motor Company is a passive shareholder in our bank.
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