In a research note issued Wednesday, Canaccord analyst Kenneth Herbert displayed a bullish sentiment on shares of Kratos Defense & Security Solutions (NASDAQ:KTOS), following today’s news that the Defense Advanced Research Projects Agency (DARPA) has awarded a $32 million contract to Dynetics for the Phase III development of the Gremlins program. As a reminder, Kratos Unmanned Aerial Systems is leading the fabrication, assembly, integration, and test of each Gremlins air vehicle.
The program is designed to accelerate the ability to perform aerial launch and recovery of volley quantities of low-cost, reusable unmanned aerial systems. This capability, once demonstrated and matured, enables a significant expansion of distributed architectures for airborne operations.
Herbert points out that the program goal is to acquire aircraft at $700k each in lots of 1,000, indicating that the potential program upside is well over $100 million for KTOS.
“We see ~$10M in contribution for KTOS in 2018-2019, but believe the contract award points to both the strong positioning of KTOS in the unmanned market and the potential upside from the tactical opportunity for the company. Note that KTOS has basically won all of the jet-powered tactical drone competitions,” the analyst noted. “We do not believe the stock, or estimates, reflect much upside from the tactical drone opportunities. So while Gremlins is not expected to significantly move the needle in 2018, it should help to increase confidence with investors in the tactical opportunity and the company’s investment strategy. The current 2018 and long-term financial guidance reflect only the legacy target drones and tactical drone development efforts, as well as the base satellite communications and other core defense markets.”
As such, Herbert maintains a Buy rating on KTOS shares, with a price target to $15.00, which represents a 28% premium from current levels. (To watch Herbert’s track record, click here)
Most analysts back Herbert’s confident take on the defense company, as TipRanks analytics showcase KTOS as a Strong Buy. Based on 4 analysts polled in the last 3 months, all 4 rate the stock a Buy. The 12-month average price target stands at $15.00, marking a nearly 28% upside from where the stock is currently trading.