KTOS - Kratos Defense Security (KTOS) - Awarded $338 million Contract We Expect More Contracts to Follow

Award. On Friday, the DoD announced Kratos has been awarded a five and a half year $338.1 million firm fixed-price, cost-plus-fixed-fee and time-and-material contract for Lots 17-21 production, out-of-warranty-repairs, and contractor logistics support. The award is for target drones for the Air Force. Fiscal 2021 procurement funds in the amount of $30,499,362 were obligated at the time of award.And It Could Be More. Historically, add-ons, such as for payloads, can increase the dollar value of the overall spend by about 30%. Meaning if Kratos received $60 million per year under the award from 2022-2027, add-ons could increase the overall annual amount received by an additional $18 million, if history is a guide.Sole Source. Significantly, this is a sole source procurement. Sole source procurements are awarded when the government deems that the contractor is the only source available that can meet the government requirements. This is significant, in our view, as it speaks to the competitive advantage Kratos has over other drone suppliers.Maintaining Outperform. KTOS shares sold off following the earnings release, dropping over 12% before rebounding some through Friday. While we can understand investor impatience, we continue to believe it is a question of when, not if, and it is difficult to forecast when contracts will be awarded. To borrow a phrase from the lottery: you have to be in it to win it. We are maintaining our Outperform rating and $30.00 12-month price target. Given the ongoing momentum across most of it business lines, we believe KTOS shares present a favorable risk/reward opportunity. We continue to believe in the long-term prospects of Kratos and believe the Company to be well positioned to capitalize on new and emerging trends in defense. Read More >>