KTOS valuation is rich and not cheap; potential buy only if price drops to ~$24.

So, what's going on here and how could you potentially play this and what is Kratos, the stock Kratos, Ktos, have anything to do with all of this?

Uh uh Whatever, you know what I'm saying. It is uh so, the defenses are growing. Uh and that's where Kratos actually comes into play. And so, we're going to do a fundamental analysis on Kratos 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 Kratos 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 Kratos 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.

Uh although these are expected to use Chinese jet engines. So, they put a small Chinese jet engine on it, which Kratos thinks one of the biggest growth verticals they're going to have is jet engines.

Now, let me just be transparent. I don't have any exposure to the defense contractors or Kratos. So, I'm not trying to like shill the stock cuz like I'm investing in We're just looking at this now and and studying this and we find this very interesting.

These Kaman 4s are not really catchable drones. They're just too fast. Uh and so that creates an issue and that's where Kratos is like, "We might be working on a potential solution."

Uh Kratos, 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 critical critical satellite-based 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 Kratos, there's some really interesting things that they talk about here. Let's close all these little sidebars out here as much as we can.

I'll leave the bookmarks open. Uh so, this is the directed energy side and they have a $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 Kratos 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 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 Kratos is really expected to take explode their deliveries of drone either weapons or Valkyries or um engine systems to help enable bombing campaigns or otherwise.

And take a look at this. Kratos recently uh Kratos is providing Spartan J85 engines. Those are their turbofan engines that they produce to support Boeing's JDAM production contract.

So, in other words, Boeing is hitting up Kratos saying, "Hey, can you guys help supply these jet engines for our missile program, basically, with the Department of Defense?"

Now, Kratos is a very small company, less than $10 billion company. 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 believe this is the Valkyrie, but I'm not sure.

But anyway, they've got a Valkyrie uh aircraft system. Uh oh, here it is. It's the XQ-58 Alpha. Yeah, yeah, okay, it was the Valkyrie. That was the Valkyrie. The Valkyrie, these things trade for somewhere between 3 to 10 million dollars a piece.

And what I think is really interesting about the Kratos 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 Valkyrie revenue uh last quarter.

So, very, very small portion of their business. Uh their product sales right now sit at about 237 per quarter. So, that alone would potentially double their quarterly revenue uh or or a quarter's product revenue.

So, let me just draw that out to be really clear to not be confusing. 200, you know, 40-ish mill, roughly what they make from products in one quarter right now. A full year of 240 million Valkyrie sales would basically, you know, double one quarter or add 25%, you know, to their product side per year.

It's interesting stat, interesting way to think about it. But, this is sort of like a smaller call option in the 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. So, if you do 5,000 in 2028 at uh 50,000 of them, uh that little calculator I was using does not have enough zeros for this. 5,000 times 50, that puts me at this number.

1 2 3 200 That's another 250 million right there, just from the jet engines.

So, you really have growth verticals coming from not just these jet engines, not just the Valkyrie UAV, but then also the de-droning technology, which they're like nudge nudge hint hint hint we can't really tell you about it right now, but you'll see it in our numbers.

Interestingly, much like how Elon Musk is talking about getting into making components for jet engines. For Elon's purposes, those would be turbine gas engines uh to run continuously to power data centers.

Here, Kratos 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 Kratos engine business to be the largest and fastest growing in the company's history.

So, that's their expectation, especially since uh China and Russia are going deep on hypersonic missiles. And remember what we have right here. China supplying jet engines for those jet engine drones that Russia is using against Ukraine.

Big business. So, here's a small market cap company that's doing exactly this sort of vertical of information of of product.

Here's the problem. They have negative free cash flow. We're expecting somewhere around negative 100 million dollars of cash flow per year on average, though this quarter they were sitting at about negative 47 already.

That's a lot, so it 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 200 mil of CapEx per year, they have 5 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 gross profit coming up about 21% suggesting that their margins are relatively stable. We 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 / 371.

Net margin 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.

And you can see we got the little terminal tab activated at the top right there. We're going to type in Kratos. And 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. 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 you have a negative forecast rate of return here. So, when we open this up, sure enough, there it is, -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 a 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. Raise 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 a 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.

But this to me this sort of defense side of stock investing isn't going anywhere anytime soon, mostly because the world is unfortunately remilitarizing.

And then, there's Kratos, a little $9 billion startup making engines for bombs and drones. Too happy, Kevin. Too happy. No, I'm not I'm not I'm not associated with Kratos. Uh not paid by Kratos. I'm not investing in Kratos.