What occurred

Protection contractor Kratos Protection & Safety Options (KTOS 14.91%) posted strong outcomes for the final three months of 2022, and administration optimism about 2023 was robust sufficient to immediate an analyst improve. Buyers are excited, sending shares of Kratos up as a lot as 19% on Friday morning.

So what

Kratos is a maker of drones, protection electronics, and different merchandise for the Pentagon and authorities patrons. Most of its drone income traditionally has been from promoting “dumb” drones used for goal follow, however the firm has invested closely in futuristic “loyal wingman” drones that may fly into battle with piloted plane.

The corporate earned $0.08 per share in the newest quarter, matching analyst expectations, on income that at $249.3 million beat the consensus estimate by about $7 million. For the complete yr, Kratos income grew by 10.7%, and the corporate ended the yr with a backlog of $201.6 million in future enterprise.

“As we start 2023, each Kratos enterprise is anticipating natural development and we’re forecasting Kratos’ consolidated ’23 over ’22 income development of roughly 10%, with elevated margins, diminished internally funded investments and elevated money movement,” CEO Eric DeMarco stated in the course of the firm’s post-earnings convention name.

The outcomes and commentary had been robust sufficient to immediate Canaccord analyst Austin Moeller to improve Kratos to purchase from maintain, and lift the agency’s worth goal to $14 from $11.50. Moeller famous that administration was “notably enthusiastic” about potential development in its authorities enterprise.

Now what

Kratos shares have misplaced greater than half their worth over the previous yr, largely attributable to buyers rising impatient ready for information about that wingman program. The corporate’s Valkyrie tactical drone has accomplished years of testing with potential authorities prospects, and buyers have now been ready on an order for greater than three years now.

They nonetheless have not gotten that order, however DeMarco on the decision stated the corporate continues to be working intently with potential prospects. And Kratos is optimistic sufficient to start a serial manufacturing run of a minimum of 12 Valkyrie drones, with the CEO saying the corporate desires the plane “out there to instantly meet anticipated buyer demand.”

Kratos stays a uncommon higher-risk, excessive potential reward funding within the sometimes staid world of protection investing. If Valkyrie can carry out the best way the corporate hopes, Kratos estimates the corporate has a possible $10 billion alternative pipeline out in entrance of it.

That is best-case, and because the inventory’s motion over the previous yr reveals, there isn’t a assure. However the year-end replace offered a reminder of the potential, and buyers are excited concerning the alternative.