Why Kratos Defense & Security Solutions Stock Soared 21.5% in August

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What happened

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After crashing 10% in the wake of its second-quarter earnings report in July, tiny defense contractor and drone-builder Kratos Defense & Security Solutions (NASDAQ: KTOS) bounced right back in August -- and booked a 21.5% gain.

So what

Why is Kratos's stock rocking? Moving quickly to stem investor concerns over its failure to earn a profit in Q2 (as it had promised to do), Kratos issued a series of positive press releases early in August, detailing contract wins to produce everything from microwave electronics products to anti-ballistic missile "modular systems," radar system components, and satellite parts. It announced nearly $44 million in total contracts, or about 6% of total annual revenues, in just one month.

Management followed that up with a positive assessment of flight tests of its new UTAP-22 "Mako" combat drone, and a series of appearances to hype its potential at aerospace and defense-industry conferences around the country. But does all of this really add up to Kratos being worth 21.5% more today than it was worth after reporting earnings?

Now what

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The answer: probably not. While $44 million of contract wins in a month is not nothing, multiplied by 12 months in a year, it still works out to only 72% of what Kratos booked in sales over the past year, making August a relatively weak month for sales -- PR impressions notwithstanding. What really matters for Kratos, if the stock is to keep performing and rewarding investors, is whether the company can deliver on earnings when it next reports in October.

Last we heard, Kratos was promising to deliver "very, very strong" revenues and profits in Q3. It was also saying it expects to be profitable and free-cash-flow positive by as early as 2018. If Kratos can deliver the profits in Q3, and stick to its promises about 2018, Kratos stock could keep on soaring.

But if not, the stock could flop again come October.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.