3 Reasons Kratos Stock Dropped 21% in May

Clearly, something big (and bad) happened to Kratos last month. But what?KTOS Total Return Price

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"Sell in May and go away.Kratos Defense & Security wish they had listened to that ancient bit of stock market wisdom.

Kratos stock cratered just a few days into the start of the dreaded month of May. Not coincidentally, this was also the month when Kratos reported its earnings

So what went wrong? Let's review.

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1. The numbers were terrible

Kratos's first quarter report featured a 3% decline in revenues, which quickly cascaded down the income statement, causing a 32% increase in losses per diluted share, a 37% increase in net losses, and a 48% increase in losses from continuing operations.

Management tried to turn the focus away from its recent losses, of course, and encouraged investors to look farther down the road toward military contracts for the development of unmanned aerial vehicles (i.e. "drones") that the company has recently won, or hopes to win. Ideally, these will yield revenue growth in the future. But management provided little in the way of guidance on expected revenues (or profits) to encourage investors to hang around and see how things turn out.

2. They're building "on spec"

One of the reasons Kratos has been posting losses and burning cash is that the company has been self-funding the development of a new combat drone that it hopes the military will buy. Dubbed the UTAP-22 Tornado

The problem is that the U.S. military is not known for its eagerness to buy new-fangled hardware built "on spec," preferring instead to tell its contractors what it wants them to build (regardless of price). In recent years, we've seen defense-tech companies develop cheap, effective prototypes of fast-missile boatsrobotic tanksoff-the-shelf fighter jet

All of these projects continue to languish. The military hasn't bought a one of them.

3. But they're paying out of pocket

Kratos' Tornado could very well turn out to be the best thing since sliced MREs, but if Kratos fails to win orders for the weapon from the military -- big orders, worth multiple millions -- the project could turn into just one big sunk cost for Kratos stock. Management isn't exactly emphasizing this possibility, but it does acknowledge that it has made "significant discretionary internally funded investments" in the development of the Tornado.

How "significant" isn't exactly clear. But S&P Global Market Intelligence

Since the company's R&D spending surge began in 2011, Kratos has invested more than $80 million of its own money in these and other development efforts. Investors can certainly hope that all these chickens will come home to roost, and begin laying golden eggs for Kratos. But the future's far from certain -- and I suspect that's a big reason Kratos' stock price is suffering.

The article 3 Reasons Kratos Stock Dropped 21% in May

Rich Smithdoes not own shares of, nor is he short, any company named above. You can find him onMotley Fool CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 309 out of more than 75,000 rated members.The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 daysconsidering a diverse range of insightsdisclosure policy