Kratos Defense & Security Solutions (NASDAQ: KTOS) reported revenue of $458.8M for the second quarter of fiscal 2026 (ended June 28, 2026), up 30.5% from a year earlier and well above analyst estimates. Kratos describes its business as spanning jet-powered drones, hypersonic vehicles and missile-related hardware, among other areas. But its operating income was slightly negative in the quarter and the company is still burning cash, so the story is faster sales without a matching rise in profit so far.
Key facts
- Aug. 4, 2026: Kratos reported Q2 FY2026 revenue of $458.8M against an analyst estimate of $410.4M, a beat of $48.4M (11.8%).
- Aug. 4, 2026: Reported EPS (earnings per share) was 0.21 against an estimate of 0.1388, a beat of $0.07 (51.3%). GAAP diluted EPS, which follows standard accounting rules, was 0.02, the same as a year earlier. The gap suggests the 0.21 figure is adjusted.
- Q2 FY2026: Operating income was $-1.6M versus $3.7M in the year-ago quarter. Net income was $4.4M, up 51.7% from the year-ago quarter.
- Oct. 26, 2026: The shares closed at 40.43 USD, up 4.52% on the day. The 52-week range is 36.37-134 USD.
- Early November 2026: The company announced it will report third-quarter results and hold a call. The consensus estimates are EPS of 0.2102 and revenue of $470.5M.
What happened
The business focus. In its own description, Kratos says its primary business areas include jet-powered unmanned aerial drone systems, hypersonic vehicles and rocket systems, propulsion systems for drones, missiles and loitering munitions (drones that circle and then strike), and microwave electronics for radar and missile defense. Kratos says affordability is a technology for it, and that it designs products up front for rapid, large-quantity, low-cost manufacturing. It makes internally funded investments to get products to market early, and works either as the lead contractor or as a partner to the big traditional defense primes.
The latest quarter. Revenue rose in both main segments. Product revenue was $289.1M versus $216.6M a year earlier, and service revenue was $169.7M versus $134.9M. Products grew faster. We have no source that explains what drove the quarter, so we do not tie the increase to any particular program or product line. Most sales are domestic: United States revenue was $360.4M, with the Middle East at $33.6M, Europe at $27.3M and Asia Pacific at $26.7M.
In October the company also announced the groundbreaking of new radar and hypersonics testing facilities in Indiana and highlighted flight tests of its J85 engine in several launch configurations, according to its releases. We have no call transcript for this quarter, so we cannot quote management on drivers or guidance.
The trend. Looking at the last several quarters:
| Quarter (ended) | Revenue | Gross margin | Operating margin | Net income | Free cash flow | |---|---|---|---|---|---| | Q2 FY2025 (June 29, 2025) | $351.5M | 21.0% | 1.1% | $2.9M | $-32.2M | | Q3 FY2025 (Sept. 28, 2025) | $347.6M | 22.2% | 2.0% | $8.7M | $-41.3M | | Q4 FY2025 (Dec. 28, 2025) | $345.1M | 21.4% | 3.0% | $5.9M | $-12.1M | | Q1 FY2026 (Mar. 29, 2026) | $371.0M | 22.6% | 2.1% | $11.9M | $-48.4M | | Q2 FY2026 (June 28, 2026) | $458.8M | 21.8% | -0.3% | $4.4M | $-27.1M |
Revenue was flat for three quarters, then jumped in the latest one. Gross margin (what is left after direct costs) held in a narrow band. Operating margin (profit after overhead and development spending) fell to its lowest level in this stretch, which means the extra sales did not translate into operating profit. Free cash flow (cash from operations minus capital spending) has been negative in every quarter shown. In Q2 FY2026, operating cash flow was $-9.9M and capital expenditure was $-17.2M. Buybacks were small or zero and no dividend is paid.
Why it matters for investors
Valuation versus peers. On trailing 12-month figures, Kratos has a P/E (price relative to earnings) of 235.19, a price/sales ratio of 4.98 and an EV/EBITDA (enterprise value relative to operating earnings) of 53.46. Its net margin is 2.0%. Among peers, Leonardo DRS has a P/E of 29.87 and a net margin of 8.5%. Aevex has a P/E of 24.77 and a net margin of 6.5%. AeroVironment and Applied Aerospace & Defense both have negative earnings, with P/E of -21.55 and -6.72 and net margins of -14.5% and -40.1%. So Kratos is far more expensive than the profitable peers on earnings, but it is not the only growth-oriented name with weak profits.
Balance sheet. This is the strong spot. At the end of the second quarter, Kratos had $1.44B in cash and short-term investments against total debt of $193.6M, and shareholders' equity of $3.43B. FMP's Altman Z score, a bankruptcy-risk gauge where higher is safer, is 7.63. Its Piotroski score, a 0-9 measure of financial health, is 5, which is middling. Cash gives the company room to keep investing while free cash flow is negative.
What analysts think. Of 25 ratings, 1 is strong buy, 21 are buy and 3 are hold, with none at sell. The consensus is "Buy." Price targets average 87.82 USD, with a median of 82.00 USD, a high of 135.00 USD and a low of 50.00 USD. Every target is above the 40.43 USD share price. Recent actions were all reiterations: Piper Sandler (Overweight) on Oct. 23, Citizens (Market Outperform) on Oct. 19, Goldman Sachs (Buy) on Oct. 12 and Jefferies (Buy) on Oct. 1. For later periods, six analysts expect revenue of $602.0M and EPS of 0.32 for the period ending March 28, 2028, and $665.6M and 0.34 for the period ending June 28, 2028.
Our MoonshotScore. Stock Expert AI's MoonshotScore V2 for KTOS is 34, rated Weak. The pillars are sector-relative: growth 15, momentum 24, quality 41, safety 96 and valuation 24. Safety is very strong, reflecting the cash-rich balance sheet. Growth, momentum and valuation score low relative to the sector, even though revenue is rising, which suggests the market has already priced in much of the story and the share price has not been rewarding it.
What could go wrong.
- Margins: Operating margin turned negative on much higher revenue. If growth keeps costing more than it earns, profits may lag for a long time.
- Cash burn: Free cash flow has been negative in every recent quarter. In Q2 FY2026, operating cash flow was $-9.9M and capital expenditure was $-17.2M.
- Valuation: A P/E of 235.19 leaves little room for disappointment. FMP's discounted cash flow model, an automated estimate of intrinsic value, gives -7.59 USD per share. That reflects negative cash flow and is a model output, not a verdict.
- Insiders: Among the 30 most recent Form 4 filings, those from the last 90 days show 0 open-market purchases and 27 sales. Sales can have many personal reasons, but there is no insider buying to offset them.
- Concentration and timing: Most revenue comes from the U.S., and defense revenue depends on government budgets and contract timing.
What to watch next
- Third-quarter results: The company said it will report after the market close in early November. The consensus estimates are EPS of 0.2102 and revenue of $470.5M.
- Operating margin: Does it return to positive territory, as it was in each of the four prior quarters?
- Free cash flow: Whether operating cash flow and capital expenditure move so that the cash burn narrows.
- Product versus service mix: Whether product revenue keeps growing faster than service revenue.
- Management's comments: Any updated guidance or discussion of what drove the margin dip.
Frequently asked questions
Q: Why did Kratos stock fall so far from its 52-week high?
The shares sit at 40.43 USD as of Oct. 26, 2026, against a 52-week range of 36.37-134 USD. FMP data does not give a reason for the decline. What the data does show is that valuation multiples are high, operating margin turned negative last quarter and free cash flow stays negative. Our MoonshotScore also rates momentum and valuation low relative to the sector.Q: Did Kratos beat earnings expectations last quarter?
Yes. For the quarter ended June 28, 2026, revenue of $458.8M beat the estimate of $410.4M, and reported EPS of 0.21 beat the estimate of 0.1388. However, GAAP diluted EPS was 0.02 and operating income was $-1.6M, so the beat came from sales, not stronger operating profit.Q: Is Kratos profitable and financially safe?
It is barely profitable: net income was $4.4M in the latest quarter and the trailing net margin is 2.0%. Financially it looks safe, with $1.44B in cash and short-term investments against $193.6M of debt. Cash burn is the thing to monitor. This article is information, not investment advice.This is educational content, not investment advice. Past performance does not guarantee future results.