Kratos Defense and Security Solutions Stock Popped, Then Dropped: What You Need to Know

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What:Shares oftiny defense contractor Kratos Defense & Security Solutions popped more than 13% in early Monday trading. They've since subsided to just about a 2.5% gain, but are still up significantly more than your average Dow or Nasdaq stock is in today's trading.

So what:Early Monday morning, Kratos announced that the Air Force Life Cycle Management Center, Armament Directorate, Test and Training Division, Aerial Targets Branch has awarded it a contract to deliver up to three lots of Air Force Subscale Aerial Target (AFSAT)drones. Simulating hostile aircraft and missiles, the Air Force uses these drones for target practice.

The first lot, designated Lot 11, valued at $24.3 million, has already been ordered. Lots 12 and 13 are "options" that may or may not ultimately be executed. If firm orders are placed, however, they will add approximately $48 million to the value of the initial order. The resulting total value of the contract award, $72.3 million, would be equal to about 8.2% of Kratos' annual revenues.

Now what: Without minimizing the importance of an 8% bump to Kratos' annual revenue haul, the outsize reaction to today's news -- 8% more revenues, 13% more expensive stock -- didn't seem quite proportionate. Meanwhile, Kratos still has a market cap of only $300 million, but a debt load of more than $660 million, and minimal cash to offset it.

Add in the fact that, unlike most defense contractors, this heavily leveraged stock pays its shareholders no dividend, and Kratos just doesn't look like a particularly good bet for investors.

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