Editor's Note: Bill recommended this little security firm to his Private Briefing readers back in June, when shares traded for $6.10. They closed above $9 a share last week, but Bill thinks there's still a ton of upside here. And thanks to some analyst-induced selling yesterday, you can buy all this growth potential at an even better price...
Since we recommended Kratos Defense & Security Solutions Inc. (Nasdaq: KTOS) back on June 6, the stock has soared nearly 40%.
And we believe there's more to come.
A lot more.
Founded in 1994, the San Diego-based Kratos is a specialized security-technology company that provides products and services crucial to U.S. national security priorities.
That national security focus is borne out by the company's customer base, which includes the U.S. Army, U.S. Air Force, U.S. Navy, the National Aeronautics and Space Administration (NASA), the Defense Logistics Agency (DLA), and the U.S. Department of Homeland Security.
The company also serves a number of strategic military bases and defense locations throughout the United States.
And wait until you see all the new business this $475 million small cap is landing...
Kratos Is a Full-Menu Operation
The services Kratos offers are involved with command, control, communications, computers, combat systems, intelligence, surveillance and reconnaissance (captured under the all-encompassing military acronym "C5ISR"), weapons-systems lifecycle support, military-weapon-range and technical services, network-engineering services, advanced IT services, security and surveillance systems, and critical-infrastructure design and integration services.
If we decode all that a bit for you, we can say that Kratos is involved in some areas whose growth potential we like a lot - including unmanned aerial vehicles (UAVs or "drones"), anti-missile-defense technology, and cybersecurity.
Best of all from an investment standpoint: During a time of tight budgets and sequestration-related cutbacks, the U.S. military can't launch multi-billion-dollar acquisition programs for new systems; it has to make do by maintaining what it has.
And some of what it has are so-called "legacy systems" that aren't made anymore, and that only a handful of companies are qualified to service.
Kratos is one of those companies, says Michael Robinson, our resident defense-and-technology specialist who edits the Radical Technology Alert advisory service.
"Bill, in lean times like these, the Pentagon just doesn't have the cash to fund a lot of the advanced, 'Next-Gen' systems it has on the drawing boards," Michael explained. "Seeing this, Kratos shifted gears and moved away from services to hardware, focusing on legacy systems. By definition, these have strong barriers to entry. Basically, the company gets designed into these aging platforms. When I talked to the CEO recently, he said that, for Kratos, it's like they've got the 'keys to the kingdom.' Clearly, the market finally woke up to that fact and the stock has just gone on a tear, making it the small-cap defense firm to own."
In short, we see much more upside for this company.
As Michael noted, there aren't going to be a slew of new competitors entering the legacy defense businesses.
And Kratos isn't standing pat.
It recently announced plans to enter the drone business, which is one of the fastest-growing sectors in defense technology. And it's also pushing deeper into security and cybersecurity-related areas.
Kratos is well-positioned to benefit from the explosive growth of the U.S. Cyber Command, which is expected to grow from about 900 workers now to as many as 4,900 by the end of 2015. Most of this new cyberspace strike force will be based in the new $358 million headquarters being built at Fort Meade, Maryland, which is located in the Washington, D.C., suburbs.
Kratos Keeps Landing New Business, Too...
Back on Aug. 21, the company announced that it had won a new five-year defense contract with a potential value of $6 billion.
Under the agreement, Kratos will provide continuous monitoring as a service to the U.S. Department of Homeland Security for its "Continuous Diagnostics and Mitigation Program." The program is designed to protect government information-technology networks from cybersecurity threats.
Patrick Howard, a Kratos executive who previously served as the chief information security officer with the Nuclear Regulatory Commission (NRC), will lead the effort.
That same week, the Kratos Electronic Products Division received orders valued at $3.1 million for the production of integrated microwave assemblies (IMA) for two critical U.S. Navy platforms. These "follow-on" awards are related to continuing production on long-term electronic attack (EA) and intelligence, surveillance, and reconnaissance (ISR) airborne platforms. No additional details were provided due to customer and other sensitivities.
Richard F. Poirier, the Electronic Products Division president, said "these orders are the latest significant awards received from this prime contractor for integrated microwave assemblies. Kratos has participated in these programs for many years and continues to be a valued supplier with the expertise capable of providing sophisticated integrated microwave assemblies and subsystems for these U.S. Navy aircraft."
We'll keep watching this stock for you...
Bill follows up on one or more of his recommendations every day. Just sign up for his daily Private Briefing to get the updates... and all of his new picks. As Bill will tell you right here, your timing couldn't be better, thanks to yesterday's big "Fed Event."
About the Author
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning at Money Map Press.