One-Hour Analysis of Kratos Defense & Security Systems

Not in Value Line, So From Various Sources

  • At half of book value this stock seems very cheap
  • But with a tremendous amount of goodwill, we would use 90% of sales as a better metric, which is not real cheap
  • This stock is essentially like a private equity deal, lots of debt and a sliver of equity
  • Would be tempted to throw the stock out, without too much more work except there are many interesting things to study here
  • Debt is trading above par, and interest is well covered
  • CEO Demarco is a great salesman, he tells a fascinating story
  • Biggest part of that story is that this management team sold Titan to L-3 in 2004 and is now perhaps trying to do the same thing here
  • Interesting discussion of the weaknesses of services business and strength of component business
  • Certainly key question is what caused all the problems 2008-10, the company nearly went under, and had to reverse split the stock
  • Oak Investment Partners bought 11 million shares, about a 20% stake, for$5/share in 2012.  These guys are no dummies.  They were early investors in stocks like Dick’s Sporting Goods, Petsmart, and Sandisk.

From Footnotes

  • Significant NOL’s exist
  • Goodwill impairment could be an issue, new annual due soon
  • It will be interesting to see where they stand with their revolver at year end

From Google Finance

  • There are 4 buy recommendations out on this stock, more than a little unusual for a company of this size
  • Well known value manager Preston Athey of T.Rowe Price owns over 8%, this is an unusual holding for him, a very interesting tidbit
  • Eveillard and Gabelli both sold a while back
  • Insiders have been buying

From Seeking Alpha

  • Not much coverage

Conclusion

KTOS is a creature of the high yield bond market. A disciplined value investor should probably run away and shield his eyes. However there is a lot to be learned by studying this company.  If I ran a hedge fund, getting 20% of profits, I might “load the boat.”

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About Gregg Jahnke

Comments

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