KTOS is overvalued at current levels due to low margins; potential buy opportunity exists if price drops to ~$24.

By the way, Cto's defense apparently builds jet power drones as well.

So, you know what would be really interesting is looking at KTOS on this talk about these jet powered drones. Q's dipping. Now, I'm not the biggest fan of uh you know, the uh military contractors just because I think the margins are relatively low.

but uh let's take a quick look at this I want to look at Katos so Kronos okay so what do we have this is net cap cash. Wow, their net income's on the low side. 11 million for 3 months.

Net cash used in operations, 27 cash paid for acquisitions, that's a lot. And capex. So, I've got negative cash flow uh plus 19.9 negative cash flow of 47.3. negative cash flow.

I have uh another 350 mil acquisition. I wonder for whom acquisition was they acquired uh let's see here is that an Israel Israeli company orbit technology state of Israel. Yeah.

Uh-huh. Okay. Tel Aviv Stock Exchange 100% 352 million in cash funded from the company's balance sheet. Leader in Oh, here it is. Mission critical satellite based communications for unmanned vessels.

So, drones basically. So, satellite com satcoms for drones. That's cool. for drones. Uh so this is the acquisition and then this is the cash flow statement. We are issuing stock.

So we've got stock issuance of 1.3 billion. I have that's how they're going to keep their cash flow and their acquisitions going. There's the cash. Here's the cash from issuance.

I have bills to pay. Bills of 410 mil. I've got uh let's see, those are bills, long-term debts, leases, finance, other long-term liabilities. Low long-term debts. Not really a long-term debt issue here.

They got plenty of cash to pay their bills and they got receivables now. So, the issuance was good. Uh really helps uh stabilize their balance sheet, especially post uh acquisition.

They would have been pretty low there. It the writing was on the wall for that. So, that's the BS also known as the balance sheet some would say. Here is their revenue. So we do have revenue growth 371 divided by 302 of about 22.8% rev growth.

I've got total cost 281 divided by 29 229 is 22.7%. Uh wait did I just do I think I did. And yeah no I did that right. 73.6 six 21.7%. Gross profit increase. So margins seem stable.

Okay. So, what I'm looking for here is I'm going to log in. Let me get the estimates for KTOS. And uh let's see what we have. Katos Katos Ktos financial anal. Okay, we're going to get the forecast.

Okay, so this is sitting at net margins at like 8% forecast, which isn't good. EPS growth is decent uh in the way of a forecast. Let's see here. Let's write that down here. So I've got 4963 divided by84 equals it's trading for 59 times and growth is 31 74 34 55 32 6417.07 07= / 4 29% expected growth and um PEG is therefore 59 divided by 20 oh my gosh 2.95 uh which is very very rich for a company forecasting 12 to 13% net margin versions.

Uh probably closer to 1.3ish maybe justified likeish. Um so maybe you could justify one six. Okay. Um, I think even that would be high because the margins are relatively low. So, I'll go 13.

So, if I go 13, 1.3 peg times 20% expected growth at 84 cents currently, that gives me a price target of about 21 bucks. So, you know, it's got some it's got like some juice already in it.

Yeah. Unless obviously the margins expand a lot. Um would would would need a margin expansion here.

Okay, that's unfortunate. Let me get the earnings call from them as well in just a moment. But I've got another piece right here that we could add to this as well. This is jet powered attributable drones, target drones.

Their flagship product is the XQ58 a Valkyrie lowcost UAV. Okay. Then we've got they acquired orbit we saw regarding satcoms. We got the jet engines. They've got partnerships on Jams with Boeing.

Uh, I actually pulled that sheet up. We'll be able to see that in just a moment. Uh, they've got contracts with the military actually some within just even the last 48 hours. So, they just kind of keep expanding their contracts.

Total backlog total backlog of 2.1 billion and bid pipeline of 15 billion. The TAM for drones is expected to grow to 2.9 billion by 2030. Uh in full year free cash flow forecast is 95 million.

So burning money to ramp up production. But this is this is and and you know it's a it's not a cheap valuation right now. It's pricey. You know it's trading for like a software margin right now.

Okay, perfect. So, let's go get that earnings call up and then uh we'll go from there. So, let's get Where is that earnings call? Got it. Here we go. Uh, okay. So, this is their call.

Let's look at drone in here. Anything on drone? Certain crotch jet drones flying with jet engines increased performance time to market and time to market. The number of opportunities has never been stronger.

So this is where they get excited about drones. Uh Department of War is looking to invest more uh into Katos drones. Then we've got it's not only a drone, missile, space arms race, but a hypersonic drone race each which intends which Ktos intends on supporting shift in the classification of investments for various drone opportunities.

Tactical fire jet. Tennable expendable magicians on the other side. A barbell going to be a handful. Blah blah blah. What is this? Our space business is ripping on the drone side.

We're going to be very cautious. What? And we may not be able to report to you when we ship until we ship and it shows up in the numbers. Until then, we don't have that much to say.

Oh, listen. Unless maybe to the unmanned systems, can you provide us with a little bit more color about how that should progress through the second half of 2027? Look at the mystery here.

Right now I have to be careful because of the customer. All right, we can't give much detail on this. They're purposely being vague here. Uh those three businesses are ripping.

They're saying hypersonics, engines, and the space business. Space business is ripping. On the drone side, we're going to be very cautious and we may not be able to report it to you until we ship and it shows up in the numbers and we may not be able to say much about it, but you're going to know what it is.

And I'm sorry, I don't like to operate that way, but we have to based on what the customers have told us. Nudge, nudge, wink, wink. [laughter] Uhhuh. Nudge, nudge. [laughter]

So bookmarks forecast basically assumes there's going to be let's see Q4 okay fine this is on forecast cash flow sale of Valkyries I think there there's a high chance their growth is going to be a lot higher because they're just going to get pummeled by money from the United fades and their stock has come down quite a bit.

Department of Energy securing nuclear assets is mobile transportable prime system integrator for nuclear assets. So that's right here. Program. We got funding for it as you probably saw with the Department of Energy and it's related to securing Oh, it's related to securing nuclear assets. It's a mobile and transportable system.

Including the directed energy system. We are responsible for the entire system working including the directed energy system. Is that that's usually like lasers eh lasers and nuclear weapons maybe targeting?

It's kind of like vague there, right? A little little vague. Uh but that could also be counter drone.

It's a mobile and transportable system related to securing. Oh, but oh, these could be counter drones like lasers to to shield, right? Ah, so I think these are directed energy aka counter drone for protecting um nuclear sites possibly.

That's probably what it is. The lasers. I mean, that's pretty cool. uh and counter drone.

Okay, we believe the program is going to grow significantly because of the type of capability is needed right now. It has to be a low low cost. So, we're doing the systems in M Montana uh and it's ramping now.

It's going to be big in Q4 and it's going to continue to ramp in 2027. Oh, here it is. Counter uh unmanned drone system solar shield.

We looked at that Valkyrie production 1.5 aircraft per month. We believe we get into 2027 we will be up to one and a half planes on average. Uh Valkyrie Valk production.

So let's see. Okay. 2027 we'll handle our US customer hopefully the Taiwan customer state department. these uh aircraft are 3 to 10 mil.

40 or I'll say 18. I mentioned a couple calls ago, we think we're trying to look to get to an average of 40. 40 per year in future would equal, you know, call it six on average times 40. That's 240 mil revenue uh potential here alone.

So, you know, go back to their income since they're a smaller company right now. That's like half their income, right? Yeah. They've got well product sales product sales are actually only that would literally double their product sales right now.

And this one vertical alone would double their product sales. This one vertical would double their product sales. Uh, and their product margins sit it's pricey. 182 divided by 237.

Their gross profit margins are only 23% on products right now. 23% GP.

23% a GP right now. But if EPS grows faster than expected, uh, valuation might be cheaper than it appears, right? Especially with the amount of money getting pumped in from the Trump administration or other words,

Shahed. Oh, thanks. Okay, so this is Valkyrie production. What is this Valkyrie related systems? See, Valkyrie Systems here unmanned was only 5.9 million. So, it's like they show sold like one Valkyrie, right? So, they're super early.

Uh, only 8 mil last quarter. I think it's at 8 mil. Might have been less, but it whatever it was, it was low. Oh, 5.9 mil. Wow. So, that's where the growth vertical is.

Factory mapped into missiles lurp with GE. What is this on turbo fans? These are roughly 600 lb of thrust and up. Sophisticated. Uh factories going to be up and running in Oklahoma.

Uh that's a partnership with GE. 5050 partnership. Uh interesting. So they do have a partnership. 3,000 energy or 3,000 engines to be built in 2027 and at least 3,000 for customers.

JDAM LR we've designed those plan to build indicate we need to build 27 28 29 we've linked forward placed orders now these are for the jet engines for the um what's it called uh the Spartan family Jams they're types of missiles cruise missiles multiple tens of thousands of lowcost $300,000 cruise missiles that are coming next here.

Wow, this is crazy. That's so interesting. GE partnership, Blade Works facility, where they produce the turbo fan. Kattos's new Blade Works facility in Oklahoma where we recently broke ground and plan to produce the turboan.

So, this is kind of like what Elon wants to get into. The engine business is going to be the largest and fastest growing in the coming years. The hypersonics generated most of their revenue or generated 200 million in 2025 currently tracking about 400 million in 2026.

So it seems like most of their uh revenue comes from hypersonics which is probably just jet propelled rocket motors. Rocket motors and jet engines uh seem to be the biggest business for them right now.

Yeah, here's the talk about Russia and China and how important it is for the US to catch up on hypersonics. Interesting. Blade works facility. Spartan engine average price $50,000. That's fascinating. Uh Spartan engine price.

This is so cool. Air Force wants to acquire 11,000 over the next six to seven years. The war machine. JDAM alone could be one of the single largest opportunities for Kattos.

Wow. Wow. Let me see what uh highlights we have because the you know with these margins it's it's overvalued but the hypersonic franchise is projected to double. We saw that from the earnings call.

Ford earnings for uh Spartan turboan jet engines. This is all in the stock um stock tab in the Mikv app. Valkyrie production scaling.

Doubling the hypersonic revenues. We saw that currently relying on some L3 aero solid rockets. Okay. Production ramp capex.

So if I go to Ktos right now, it's going to say it's overvalued because the margins suck. Yeah. 63% downside for this right now. Uh balance sheet good though. Yeah, cuz they just raised a ton of freaking money.

So, we'll look at that in just a moment. But let's also take a peek at stock market. We could also do a uh a fib retrace on this. Probably go down to I mean pre Man, it was cheap for a while there, huh?

It's a little startup. It's And then it got super expensive during uh the leadup to the Iran war.

Not exactly sure where to throw a retracement on this. I might go right here to 23 bucks. That was co. Yeah, I might go down here. Go to 2390. All right, let's specify that. 1342390.

We'll start with that and we'll see how that looks.

Not bad, actually. Holy smokes. Look at that. Perfectly nailed these two. Uh, three bounces here. A bounce, reject, reject, nailed, nailed, and basically sitting there right now.

So technically we could retrace back down if we lose this line here to 2390. But you know it starts looking like it's only a9 billion company.

And what is Kattos, the stock Ktos, Kos, have anything to do with all of this?

Uh, so the defenses are growing. Uh, and that's where Katos actually comes into play. And so, we're going to do a fundamental analysis on KTOS to see exactly what they're developing and how this applies to exactly this race that's going on.

You can see here in the Katos uh earnings call Q4 is important because of this program. We got funding for it. The Department of Energy is looking for companies to help secure nuclear assets.

They're developing a mobile and transportable system where KTOS is the prime contractor responsible for the entire system working including the directed energy weapons where the goal is to intercept these drones at a low low cost and these technologies are just now ramping and ramping into 2027.

which Katos thinks one of the biggest growth verticals they're going to have is jet engines. No, and I just be transparent. I don't have any exposure to the defense contractors or CTO.

So, I'm not trying to like shill the stock because like I'm investing in. We're just looking at this now and and studying this and we find this very interesting.

and that's where Kattos is like, we might be working on a potential solution.

Kattos, speaking of Israelis, just acquired a company that was an Israeli company called Orbit Technologies Limited, and they are a satcoms for drones companies uh for UAVs, but also for missiles.

They specifically say leading global provider of mission criti critical satellitebased communications for mobile and unmanned aerial, seaborn, undersea, and land systems as well as other systems. Other systems are probably like rockets.

So, if we look at the earnings call for Katos, there's some really interesting things that they talk about here. And they have $150 million contract for counter uh unmanned aerial vehicles or systems called the as part of the solar shield program.

So if I now just jump into some of the hints that KTOS gives. Look at this. An analyst asks about unmanned systems and guidance on these unmanned drone systems. And the president and CEO says the following.

We have to be very careful here because of the customer. So we can't get into too much detail on this because then it will give away what we're doing. Our hypersonics business, the engine business basically, and the space business, those businesses are ripping.

But on the uh on the drone side, we're going to be very cautious and we not may not be able to report it until we ship it and it shows up in the numbers. And even then, we may not be able to say much about it, but you're going to know what it is.

This is a really big nudge nudge wink wink that over the next year Kattos is really expected to explode their deliveries of drone either weapons or Valkyries or um engine systems to help enable bombing campaigns or otherwise.

Kattos recently uh Katos is providing Spartan J85 engines. Those are their turboan engines that they produce to support Boeing's JDAM production contract. So in other words, Boeing is hitting up KTO saying, "Hey, can you guys help supply these jet engines for our missile program basically with the Department of Defense?"

Now, Cronto is a very small company, less than $10 billion company, but here's the smart a Spartan line of jet engine. They also produce the uh the Valkyrie aircraft. That's somewhere in here.

I think I believe that's this. This is under their their air, but I I believe this is the Valkyrie, but I'm not sure. But anyway, they've got a Valkyrie uh aircraft system. Oh, here it is.

It's the XQ58 Alpha. Yeah. Yeah. Okay. It was the Valkyrie. That was Valkyrie. The Valkyrie. These things trade for somewhere between $3 to $10 million a piece.

And what I think is really interesting about the Ktos numbers is that if you just look at Valkyrie production alone right here, they think they can get to about 40 of these produced per year.

If I assume a sort of midpoint of $6 million per Valkyrie, 40 per year times 6 million would be $240 million of annual potential revenue. That's annual potential revenue. Uh they only produced about $5.9 million of Valkyrie revenue uh last quarter. So very very small portion of their business.

Where they really seem to make a lot of money right now is on the Spartan engine. They call it one of the single largest opportunities with tens of thousands of those systems expected to be sold.

Right now, we're planning initial orders of 3,000 Spartan turbo jet engines. We expect to produce an additional 5,000 in 2028. Each of them worth about $50,000.

Here, Katos has a Blade Works facility in Oklahoma where they've recently broken ground to help produce these turbo fans. Their hypersonics business is on pace to double from 2025 to 2026 and they expect their KTOS engine business to be the largest and fastest growing in the company's history.

So here's a small market cap company that's doing exactly this sort of vertical of information or of of product. Here's the problem. They have negative free cash flow. We're expecting somewhere around negative hundred million dollars of cash flow per year on average.

This quarter they were sitting at about -47 already. That's a lot. So that might even be more. Forecast negative free cash flow is negative 95 million. It might be more than that.

Their balance sheet is okay now because they raised a bunch of money. They issued a bunch of stock. They raised a bunch of money. So they have about a billion bucks free of free cash flow. 1 billion of free cash flow.

So if you take uh 200 mil of capex per year, they have five years of capex budget basically. So that's pretty good. You know, they've they've got a decent balance sheet, low on the long-term debt side. Revenue growth overall growing about 22.8%.

I've got uh gross profit coming up about 21% suggesting that their margins are relatively stable. We uh have got the carp information. And then here's the problem. Valuation valuation of the company is a little bit rich right now.

It at at the future margins, the net margins they expect, I mean their net margin right here is shamefully low. Their net income is 11.9 divided by 371. Net margins 3.2% right now.

So forecast margins put them at close to 12 to 13%. That really means they justify about a 1.3 peg. So they are expensive. They are not cheap. You can I mean right now they're trading for software multiples.

So if we pull up the stock AI tool, we're going to see that right now the stock AI tool is telling us this company is on the more expensive side. Uh so here's how we're going to do this.

We're going to open up the uh Reinvest terminal app. And uh you can see we got the little terminal tab activated at the top right there. We're going to type in KTOS and uh we can see here the balance sheet is rated heavily.

I would agree with that. Pricing power margins are stable. So it's pretty neutral there. Moving average, the stock has come down a little bit. Uh but the valuation is really high.

So we have a red flag on valuation. So we're going to expect that it's actually going to say we have a negative forecast rate of return here. So when we open this up, sure enough, there it is.

Negative 62% potential forecast on the stock price. That's bringing it down to a fair valuation for the company right now. It's very pricey and it's gone through one heck of uh a move here.

Let's go zoom out for a moment on the week chart. Take a look at that explosion that it had. it really meme rallied and they raised money during the meme rally which was perfect, beautiful raised money from the meme squeeze, but now they're coming back down to reality and uh frankly this could be a buy if it came down to about 24 bucks uh because that would be a technical retracement and it would really closely align with the fair value estimate that the stock tab has for this company.

Uh now if you scroll down through this company you can actually automatically see a lot of the information that we have. This is the meet Kevin app. Uh you can see a lot of the information here such as that doubling of the hypersonic business to potentially over 700 million almost to double again next year.

The unit economics on the jet engine. A lot of this that you know we manually researched is is already just built into this which is really phenomenal.