Daily Stock Pick: May 11th, 2023

It’s no secret that the U.S. is the world’s largest spender on defense. And this spending – resulting in $400 billion in contracts awarded to the private sector every year – has created a booming industry that shows no signs of slowing down.

And really, why would it? Events like the Ukraine invasion, escalating tensions with China, and seemingly never-ending conflict in the Middle East have only highlighted the need for America to stay ahead in the arms race. This is an industry which is not only permanently here to stay – but likely to only keep increasing.

Of course, because of the nature of this industry, the #1 customer to all these companies is Uncle Sam. That’s why today’s daily stock pick is a leading government contractor that specializes in unmanned systems (the present and future of warfare) plus a host of other systems related to aerospace.

The stock has also been on a tear – having increased by 35% this year, with analysts seeing another 26% possible upside in the stock.

Kratos Defense & Security Solutions, Inc. (KTOS)

Named after the Greek god of war (and popular video game franchise character), KTOS is a San Diego-based company specializing in directed-energy weapons, unmanned systems, satellite communications, cyber security/warfare, microwave electronics, missile defense, training and combat systems.

In short – it’s diversified (at least within the industry), and this is reflected in the broad range of contracts it has with the US government. This alone is a big plus point, as it makes the company much less vulnerable to the loss of any single contract.

That said, the company’s shining stars – its Valkyrie and Air Wolf tactical drone systems – have been rated as far ahead of its competition (with one analyst saying that “the company’s competitors are not anywhere close to having a comparable system to Valkyrie or Air Wolf.”).

Even after a 35% gain this year – leading to KTOS trading at around the $13.50 mark – the mean analyst price target stands at around $17.10, implying a further 26% gain.

Its recent first-quarter 2023 earnings seem to support the narrative – adjusted earnings per share came in at $0.06 for the quarter compared to $0.04 from the previous quarter. It was also double the consensus estimate of $0.03 per share. 

KTOS also has a $1.13 billion backlog as at March 31, 2023 – 26% higher than its entire FY2022 revenue.

To your wealth,
Felix @ Ace of Investing