Canaccord analyst Kenneth Herbert remains enthusiastically bullish on Kratos Defense & Security Solutions, Inc (NASDAQ:KTOS), after hosting two days of investor meetings with management. The analyst maintains a Buy rating on KTOS, with a $15 price target, which implies an upside of 17% from current levels. (To watch Herbert’s track record, click here)
Herbert wrote, “Management remains very confident in the near-term top-line outlook, but appreciates investor concern over the step-up in execution requirements in 2018. The prospect of increased M&A activity in the defense market, management believes, is further proof that it is well positioned in areas of growth, notably missile defense, unmanned systems, and satellite communications. We believe margin and FCF improvement in 2018 will be positive for the stock (demonstrating the focus on execution) and incremental revenue opportunities can drive upside. While the defense budget CR through December is a slight headwind, recent Senate passage of the FY18 defense budget with strong bi-partisan support is a positive.”
“Management reiterated its plan for a use of $25-30M in 2017, but that it should be FCF positive in 2018. The key swing factor is the fact that the company used $30M in 2017 to fund development of the unmanned tactical programs (notably 3 Valkyrie aircraft) which rolls off in 2018. The Valkyrie aircraft are expected to be complete by March 2018. We believe positive FCF will help with concerns about execution and FCF improvement, financial stability,” the analyst continued.
Out of the 4 analysts polled in the past 3 months, 3 rate Kratos stock a Buy, while 1 rates the stock a Hold. With a return potential of 13.5%, the stock’s consensus target price stands at $14.57.