With a 7.14% daily gain and a 3-month gain of 19.87%, Kratos Defense & Security Solutions Inc (KTOS, Financial) has drawn the attention of investors. However, its Loss Per Share stands at 0.2. This raises the question: Is the stock modestly undervalued? This article delves into the financials of Kratos Defense & Security Solutions to provide a comprehensive valuation analysis. Read on for valuable insights.
Company Introduction
Kratos Defense & Security Solutions Inc develops and fields transformative, affordable technology, platforms, and systems. The company operates through two segments: The Kratos Government Solutions (KGS) and The Unmanned Systems segment. The majority of its revenue comes from the KGS segment. With a current stock price of $16.21 per share and a market cap of $2.10 billion, the company's value compared to its GF Value, an estimation of fair value, warrants further exploration.
Understanding the GF Value
The GF Value represents the current intrinsic value of a stock derived from our exclusive method. The GF Value Line on our summary page gives an overview of the fair value that the stock should be traded at. It is calculated based on three factors:
- Historical multiples (PE Ratio, PS Ratio, PB Ratio and Price-to-Free-Cash-Flow) that the stock has traded at.
- GuruFocus adjustment factor based on the company's past returns and growth.
- Future estimates of the business performance.
The stock of Kratos Defense & Security Solutions appears to be modestly undervalued based on GuruFocus' valuation method. GF Value estimates the stock's fair value based on three key factors: historical multiples, an internal adjustment based on the company's past business growth, and analyst estimates of future business performance. If the stock's share price is significantly above the GF Value Line, the stock may be overvalued and have poor future returns. On the other hand, if the stock's share price is significantly below the GF Value Line, the stock may be undervalued and have high future returns.
Because Kratos Defense & Security Solutions is relatively undervalued, the long-term return of its stock is likely to be higher than its business growth.
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Financial Strength
Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. Kratos Defense & Security Solutions has a cash-to-debt ratio of 0.17, which is worse than 73.38% of 293 companies in the Aerospace & Defense industry. GuruFocus ranks the overall financial strength of Kratos Defense & Security Solutions at 6 out of 10, which indicates that the financial strength of Kratos Defense & Security Solutions is fair.
Profitability and Growth
It is less risky to invest in profitable companies, especially those with consistent profitability over the long term. A company with high profit margins is usually a safer investment than those with low profit margins. Kratos Defense & Security Solutions has been profitable 3 over the past 10 years. Over the past twelve months, the company had a revenue of $966.60 million and Loss Per Share of $0.2. Its operating margin is 0.98%, which ranks worse than 64.97% of 294 companies in the Aerospace & Defense industry. Overall, the profitability of Kratos Defense & Security Solutions is ranked 4 out of 10, which indicates poor profitability.
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term performance of a company's stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of Kratos Defense & Security Solutions is 2.6%, which ranks better than 50% of 264 companies in the Aerospace & Defense industry. The 3-year average EBITDA growth rate is -32.5%, which ranks worse than 86.96% of 230 companies in the Aerospace & Defense industry.
ROIC vs. WACC
Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its weighted cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Kratos Defense & Security Solutions's ROIC was 1.2, while its WACC came in at 9.2.
Conclusion
In conclusion, the stock of Kratos Defense & Security Solutions appears to be modestly undervalued. The company's financial condition is fair and its profitability is poor. Its growth ranks worse than 86.96% of 230 companies in the Aerospace & Defense industry. To learn more about Kratos Defense & Security Solutions stock, you can check out its 30-Year Financials here.
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This article, generated by GuruFocus, is designed to provide general insights and is not tailored financial advice. Our commentary is rooted in historical data and analyst projections, utilizing an impartial methodology, and is not intended to serve as specific investment guidance. It does not formulate a recommendation to purchase or divest any stock and does not consider individual investment objectives or financial circumstances. Our objective is to deliver long-term, fundamental data-driven analysis. Be aware that our analysis might not incorporate the most recent, price-sensitive company announcements or qualitative information. GuruFocus holds no position in the stocks mentioned herein.
