What a brutal six months it’s been for Kratos. The stock has dropped 40.3% and now trades at $46.40, rattling many shareholders. This may have investors wondering how to approach the situation.

Following the pullback, is now a good time to buy KTOS? Find out in our full research report, it’s free.

Why Does Kratos Spark Debate?

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.

Two Things to Like:

1. Core Business Firing on All Cylinders

Investors interested in Defense Contractors companies should track organic revenue in addition to reported revenue. This metric gives visibility into Kratos’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.

Over the last two years, Kratos’s organic revenue averaged 14.6% year-on-year growth. This performance was fantastic and shows it can expand quickly without relying on expensive (and risky) acquisitions.

2. Projected Revenue Growth Is Remarkable

Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite, though some deceleration is natural as businesses become larger.

Over the next 12 months, sell-side analysts expect Kratos’s revenue to rise by 29.9%, an improvement versus its 12.9% annualized growth for the past five years. This projection is eye-popping and suggests its newer products and services will fuel better top-line performance.

One Reason to Be Careful:

Cash Burn Ignites Concerns

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Kratos’s demanding reinvestments have drained its resources over the last five years, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 5.1%, meaning it lit $5.10 of cash on fire for every $100 in revenue.

Final Judgment

Kratos has huge potential even though it has some open questions. With the recent decline, the stock trades at 60.9× forward P/E (or $46.40 per share). Is now the time to initiate a position? See for yourself in our in-depth research report, it’s free.

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