Kratos Defense & Security Solutions, Inc.

I, Mike Crawford , certify that this report reflects my personal beliefs about this company and that no portion of my compensation was, is or will be directly or indirectly related to the specific recommendations or views discussed in this report.


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Disclosure Chart

Initiated Coverage on 11/24/2008 with a "Buy" Rating and a Price Target of $26.40.

Ratings Distribution as of August 21, 2017
Rating Number of Companies Percent of Total
Buy 145 74.4%
Neutral 49 25.1%
Sell 1 0.5%
Total 195 100%
% with Investment Banking Relationships
Rating Number of Companies Percent of Total
Buy 23 88.5%
Neutral 3 11.5%
Sell 0 0.0%
Total 26 100%

Explanation of B. Riley & Co. LLC's Rating System

  • Buy: We generally expect “Buy” rated stocks to have an above-average risk-adjusted total return over the next 12 months. We recommend that investors buy the securities at the current valuation.
  • Neutral: We generally believe “Neutral” rated stocks will have an average risk-adjusted total return over the next 12 months.
  • Sell: We generally expect “Sell” rated stocks to have a below-average risk-adjusted total return over the next 12 months. We recommend that investors reduce their positions until the valuation or fundamentals become more compelling.

Risks and Considerations

  • Acquisition/Integration - The Company actively evaluates potential acquisitions as part of its growth strategy. Acquisitions pursued by the Company could be dilutive to financial results and result in a difficult, dilutive or expensive integration.
  • Competition - The industry is highly competitive and many of the Company's competitors have greater resources.
  • Execution - Management may not execute well on its restructuring efforts as it allocates capital and human resources towards acquisitions and related integration, possibly resulting in lower margins and cash flow.
  • Financial Results - The Company has raised money via public offerings several times in the past and may need to do so again if it can not sustain positive cash flow.
  • Growth Plan - There are many factors that may impact the company's ability to achieve its stated growth objectives.
  • General Industry - The Company could miss our estimates and/or their financial guidance.
  • Further Potential Risks - See the Company's SEC filings, particularly its 10-K filing, for a discussion of further potential risks.

Additional Risks and Considerations

    • Performance Qualifications - To compete effectively on a decreasing number of increasing-size contract vehicles, Kratosmust be able to show it has the prior performance qualifications (quals) to be viable. Companies that can not adapt to the current competitive environment will slip in relevance and see contract backlogs begin to erode. Kratos needs to demonstrate a strong track record on its current contracts not only to win recompetes on its existing business but also to demonstrate if possesses the necessary skills to compete on new business development initiatives coming up for bid.
    • Recompetes - The nature of the defense IT beast is for contract vehicles to last three to five years, with a three to five year option at the tail end. The flip side to the cycle is that every year, incumbent service providers must recompete to retain a portion of their existing business. While the past rule of thumb has been that a contractor would have to have really messed something up not to keep the business on the recompete, there remains pressure to perform, and each new RFP must be treated as a competitive process.
    • New Administration - Potential defense budget cuts under the Obama administration could hurt businesses supporting the DoD. Most at risk, we believe, are big ticket platforms susceptible to cost overruns—such as Future Combat Systems and space-based missile defense.
    • Business Partners - If the Company’s subcontractors or suppliers fail to perform their contractual obligations, Kratos’ performance and reputation as a contractor and ability to obtain future business could suffer.
    • Competition – The Company faces intense competition from many competitors that have greater resources than it does, which could result in price reductions, reduced profitability or loss of market share.