Defense Contractors Stocks Q2 In Review: Kratos (NASDAQ:KTOS) Vs Peers
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Earnings results often indicate what direction a company will take in the months ahead. With Q2 behind us, let’s have a look at Kratos (NASDAQ:KTOS) and its peers.
Defense contractors typically require technical expertise and government clearance. Companies in this sector can also enjoy long-term contracts with government bodies, leading to more predictable revenues. Combined, these factors create high barriers to entry and can lead to limited competition. Lately, geopolitical tensions–whether it be Russia’s invasion of Ukraine or China’s aggression towards Taiwan–highlight the need for defense spending. On the other hand, demand for these products can ebb and flow with defense budgets and even who is president, as different administrations can have vastly different ideas of how to allocate federal funds.
The 15 defense contractors stocks we track reported a very strong Q2. As a group, revenues beat analysts’ consensus estimates by 4.7% while next quarter’s revenue guidance was 6.7% below.
After much suspense, the Federal Reserve cut its policy rate by 50bps (half a percent) in September 2024. This marks the central bank’s first easing of monetary policy since 2020 and the end of its most pointed inflation-busting campaign since the 1980s. Inflation had begun to run hot in 2021 post-COVID due to a confluence of factors such as supply chain disruptions, labor shortages, and stimulus spending. While CPI (inflation) readings have been supportive lately, employment measures have prompted some concern. Going forward, the markets will debate whether this rate cut (and more potential ones in 2024 and 2025) is perfect timing to support the economy or a bit too late for a macro that has already cooled too much.
Luckily, defense contractors stocks have performed well with share prices up 10.5% on average since the latest earnings results.
Kratos (NASDAQ:KTOS)
Established with a commitment to supporting national security, Kratos (NASDAQ:KTOS) is a provider of advanced engineering, technology, and security solutions tailored for critical national security applications.
Kratos reported revenues of $300.1 million, up 16.8% year on year. This print exceeded analysts’ expectations by 8.7%. Overall, it was a very strong quarter for the company with an impressive beat of analysts’ organic revenue and earnings estimates.
Eric DeMarco, Kratos’ President and CEO, said, “Kratos’ position as a leading defense technology company is reflected in our second quarter and six month year to date organic growth rates of 16.7% and 18.1%, respectively. We are growing the business, while also increasing our profitability, with second quarter and year to date EBITDA growth of approximately 38.4% and 44.8%, over Q2 and six months year to date 2023, respectively. Additionally, we are making significant investments in facilities, manufacturing capacity, infrastructure, research, development and more, to address growing U.S. National Security needs and certain large, new program and system opportunities for Kratos, including as reflected in our record opportunity pipeline of $12.0 billion.”