Kratos Defense & Security Solutions, Inc (NASDAQ:KTOS) investors may have been less than enthused with a quarterly print that revealed a loss of $6.2 million, sending shares on a roughly 5% pullback, but from the eyes of Canaccord analyst Kenneth Herbert, Kratos is in great shape, with a robust quarter, an expanding pipeline, and a management team that has the confidence in its wheelhouse of prospects to hike up its revenue outlook for the year.
For the second quarter, Kratos posted ($0.07) in EPS, or $0.01 on an adjusted basis, coupled with $11.5 million in adjusted EBITDA. Total revenues for the quarter saw a 10.4% rise in top-lione growth to $186 million, which along with adjusted EBITDA beat Herbert’s expectations. The analyst cheers, “the quarter was generally strong,” and highlights long-term opportunities for further growth waiting in the wings for Kratos- especially if the company can clear the path leading to positive free cash flow by next year. Kratos has maintained its outlook for free cash flow for 2017 at $25 million in cash. “Again, we believe investors will pay for growth at this point in the cycle of FCF, but hitting positive FCF in 2018 would be incrementally positive,” adds the analyst.
Herbert believes that although the company is not yet ready “to commit to $80M in adjusted EBITDA for 2018,” he does note that the “visibility on potential $800M in revenues in 2018 is increasing.” The analyst opines “management is not letting up on its push for margin expansion [and…] sees the unmanned business as a mid- to high-teens margin business.” In fact, the company is adamant that they will reach $150 million in unmanned revenues by 2018, the analyst.
There is also “a long runway” for besting the top-line, Herbert is confident that “upside here will continue to be a positive catalyst for the stock.” Moving forward, the analyst underscores KTOS is “talking up several new material opportunities (largely in the tactical unmanned market, but also in other segments), which we believe points to the increased focused on readiness, better stability in the defense budget (management is confident on hitting its targets even with a potential 3-4 month continuing resolution), and geopolitical concerns.”
In reaction to the print, Herbert continues to root for Kratos, maintaining a Buy rating on Kratos stock while lifting the price target from $14 to $15, representing a 28% upside from current trading levels. (To see Herbert’s track record, click here.)
TipRanks analytics demonstrate KTOS as a Buy. Out of 3 analysts polled by TipRanks in the last 3 months, 2 are bullish on Kratos stock while 1 remains sidelined. Aligning with current levels, the stock’s consensus target price stands at $11.63.