Why Kratos Stock Just Dropped

Kratos Defense & Security (NASDAQ: KTOS) stock fell 5.3% through 10:20 a.m. Thursday despite beating on Q1 earnings report last night.

Analysts expected the drones manufacturer to earn $0.13 per share, pro forma, on $344.6 million in sales. In fact, Kratos earned $0.16 per share and reported sales of $371 million.

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The news wasn't quite as good as that sounds, however.

Sales surged 23% year over year in Q1, led by the company's unmanned systems (i.e., drones) unit, which grew 31%. Government solutions accounted for the bulk of Kratos's revenue, but grew only 12%.

GAAP earnings (earnings calculated under generally accepted accounting principles) more than doubled year over year, but still amounted to only $0.07 per share -- not $0.16.

And Kratos's free cash flow ran negative, with the company reporting $47.3 million in cash burn for the quarter ($43.1 million if you count proceeds from asset sales). On the plus side, this was a bit less cash than Kratos burned in Q1 2025.

Kratos has reported positive GAAP profits over the past two years but has burned cash in most years. The good news is that the company continues to grow rapidly -- and may eventually grow itself out of this trend. Book-to-bill looked good in Q1, with a 1.6x ratio of new orders coming in versus old orders being fulfilled and transformed into revenue.

Accordingly, Kratos is raising its guidance through the end of 2026, and now anticipates sales of $1.7 billion or better. Still, free cash flow will run negative by $85 million to $105 million.

At a valuation north of 360 times earnings, and with cash still on fire, I see no compelling reason to own Kratos stock today.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Kratos Defense & Security Solutions. The Motley Fool has a disclosure policy.

Why Kratos Stock Just Dropped was originally published by The Motley Fool