Why Kratos Defense & Security Stock Just Popped 12%

What happened

Shares of Kratos Defense & Security Solutions (NASDAQ:KTOS), a small defense contractor specializing in the manufacture of jet-powered military drones that can fly in formation with piloted fighter jets, are soaring this morning, up a solid 12% as of 10:45 a.m. EST. Partly, this is a thing of Kratos’ own doing.

But partly it’s because of AeroVironment (NASDAQ:AVAV).

Kratos XQ-58A Valkyrie demonstrator drone.

Kratos XQ-58A Valkyrie jet-powered combat drone. Image source: Kratos Defense & Security Solutions.

So what

Yesterday morning, Kratos announced that an unidentified “long-term international customer” has just placed an order with it for the delivery of 20 high-performance jet drones. Now, “due to competitive, customer-related, and other considerations,” Kratos says that “no additional information will be provided related to this new contract award.” In particular, that means no information about the value of the contract. Kratos did point out, though, that it has been ramping production of its jet-powered drones “in anticipation of future drone orders,” so business is clearly going well for Kratos.  

That’s the Kratos-specific part of today’s news.

Adding to enthusiasm about the drone maker’s stock, meanwhile, is news out this morning regarding one of Kratos’ rivals, propeller-driven drone maker AeroVironment. As reported today, AeroVironment is paying $405 million in cash and stock to acquire yet a third player in the drones space, Arcturus UAV, specifically aiming to increase its exposure to the military market for unmanned aerial vehicles.

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Now what

This development suggests that interest — and merger and acquisition activity — may be picking up in the market for unmanned aerial vehicles.

Granted, just because Kratos operates in this market doesn’t mean that it is now in play as an acquisition target itself. For one thing, at a $3.8 billion market capitalization, Kratos would make for a much bigger meal for any potential acquirer to swallow. Indeed, the company is probably out of reach unless a much bigger predator — like Lockheed Martin or Northrop Grumman — comes sniffing around. That doesn’t mean, however, that Kratos itself might not begin throwing its market cap around and making acquisitions of its own, and potentially enjoying a big bump in market valuation for its trouble.

That sure worked out for AeroVironment stock today. It might work out for Kratos, too.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.


View more information: https://www.fool.com/investing/2021/01/14/why-kratos-defense-security-stock-just-popped-12/

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