This defense stock looks attractive after a sell-off, says JPMorgan
Shares of Kratos Defense & Security Solutions may be down 55% from their January highs, but JPMorgan thinks the sell-off is over and it’s time to buy. The bank upgraded the stock to overweight from neutral, while lowering its price target to $82. That indicates an almost 40% gain from Thursday’s close. Analyst Seth Seifman said in a note that the stock still isn’t cheap — with Kratos trading at 76 times forward earnings — but notes that investors have been awarding high-growth companies in this sector with elevated premiums. “Kratos has distinguished itself by winning and executing new work, partnering with the industry’s biggest players, providing more affordable high-end systems, and investing ahead of need, which is what [the Defense Department] wants contractors to do,” wrote Seifman. KTOS YTD mountain KTOS year-to-date. However, Seifman said the company still needs to make progress throughout the year on sales and margins, and the cash they need to keep funding their growth remains high. But while it needs to keep spending, Seifman is finding comfort in the company’s improving balance sheet. “Kratos’s expected cash outflow of ~$100m this year would be smaller than last year’s $137m and reflects capex and working capital to support anticipated top line growth,” he wrote. “Cash flow is where Kratos has seen the most pressure on guidance and continued wins mean this could persist, but the market is more accepting when the top line is growing briskly.” Kratos was up more than 3% in premarket trading Friday.
