The Kratos Defense story

What drives the business

• Kratos combines internally funded product development with established military programs, including BQM-167 drones for the U.S. Air Force and BQM-177 drones for the U.S. Navy, while the U.S. Government accounted for 68% of revenue in fiscal 2025.
• Its MACH-TB 2.0 hypersonic contract, the largest in company history, has an estimated value of $1.45 billion if all options are exercised over a five-year period, following successful flights of its Zeus rocket motors and Erinyes hypersonic system.
• Government Solutions, which includes rockets, turbines, microwave electronics, space and training, generated $379.7 million in the quarter to June 2026, while Unmanned Systems generated $79.1 million, with growth there primarily driven by Valkyrie activity.
• The November 2025 agreement to acquire Orbit Technologies for $356.3 million expanded Kratos' push into satellite communications, and Government Solutions' 36.4 percent revenue growth in the quarter to June 2026 included Orbit and Nomad acquisitions alongside 22.0 percent organic growth.
• Backlog reached $2.084 billion and the bid and proposal pipeline reached $15.0 billion on June 28, 2026, with a book-to-bill ratio of 1.3 to 1 over the last twelve months indicating bookings exceeded recognized revenue.

What the price assumes

At $41.94, the reverse DCF implies operating earnings, used as a stand-in for free cash flow, growing 65.3% a year for ten years at a 10.3% discount rate.

That compares with 19.9% annual operating earnings growth over the last 10 years and the TenQ check's 12.0% bar, which slows the historical record halfway toward 4%.

The distinction between earnings and cash matters because free cash flow was -$129 million over the last twelve months, and Kratos passed 0 of 6 TenQ Value checks despite passing 6 of 6 Growth checks.

Value KTOS on your own assumptions

What could change the story

• Government budget delays, procurement changes or cancellations affecting programs such as Sentinel, MACH-TB 2.0 and the military drone programs could interrupt revenue, and $512.7 million of backlog was unfunded on June 28, 2026.
• Supplier delays and shortages of skilled labor could slow production, while higher input costs can pressure the fixed-price contracts that represented approximately 69% of fiscal 2025 revenue.
• A 1.2% operating margin and weak cash conversion left Kratos passing only 1 of 6 TenQ Quality checks, making production scale and cost control important to translating revenue growth into earnings.
• Cash and short-term investments of $1.4 billion and total debt of $0 provide funding capacity, but management expects investments in staffing, inventory and facilities to continue at least into fiscal 2027.
• The share count rose 30.4% over three years, and stock-based pay was $50 million over the last twelve months, making dilution another part of the cost of expansion.

What to watch next

• Kratos forecasts revenue of $460 million to $480 million and Adjusted EBITDA of $40 million to $45 million for the third quarter of 2026, with full year revenue of $1.750 billion to $1.810 billion.
• Management expects approximately 18 percent to 23 percent organic revenue growth for full year 2026, with stronger second-half revenue dependent on receiving long-lead components for customer-funded programs.
• Operating margins, inventory requirements and free cash flow will show whether increased production is offsetting expansion costs, alongside management's forecast for full year 2026 Adjusted EBITDA of $173 million to $176 million.
• Management expects to issue initial full year 2027 guidance with the third quarter of 2026 results, providing a clearer view of spending and margins behind its plans for 3,000 jet engines in 2027 and approximately 40 Valkyries annually beginning by the beginning of 2028.

Sources

• Kratos Defense's earnings release, filed with the SEC
• Its latest 10-Q or 10-K, for the risk factors
• The KTOS stock report, for every figure and check