Intrinsic value of Kratos Defense&Security Solutions - KTOS

Previous Close

$15.47

  Intrinsic Value

$1.16

stock screener

  Rating & Target

str. sell

-92%

Previous close

$15.47

 
Intrinsic value

$1.16

 
Up/down potential

-92%

 
Rating

str. sell

We calculate the intrinsic value of KTOS stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 0001), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 1.6

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
   2
   3
   4
   5
   6
   7
   8
   9
   10
   11
   12
   13
   14
   15
   16
   17
   18
   19
   20
   21
   22
   23
   24
   25
   26
   27
   28
   29
   30
   31

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  2.20
  2.48
  2.73
  2.96
  3.16
  3.35
  3.51
  3.66
  3.79
  3.92
  4.02
  4.12
  4.21
  4.29
  4.36
  4.42
  4.48
  4.53
  4.58
  4.62
  4.66
  4.69
  4.72
  4.75
  4.78
  4.80
  4.82
  4.84
  4.85
  4.87
Revenue, $m
  768
  787
  809
  833
  859
  888
  919
  953
  989
  1,028
  1,069
  1,113
  1,160
  1,210
  1,263
  1,318
  1,377
  1,440
  1,506
  1,575
  1,649
  1,726
  1,808
  1,894
  1,984
  2,079
  2,180
  2,285
  2,396
  2,513
Variable operating expenses, $m
  649
  664
  681
  700
  721
  743
  768
  794
  823
  853
  841
  875
  912
  951
  993
  1,037
  1,083
  1,132
  1,184
  1,239
  1,297
  1,358
  1,422
  1,489
  1,560
  1,635
  1,714
  1,797
  1,884
  1,976
Fixed operating expenses, $m
  128
  131
  133
  136
  139
  142
  146
  149
  152
  155
  159
  162
  166
  170
  173
  177
  181
  185
  189
  193
  197
  202
  206
  211
  215
  220
  225
  230
  235
  240
Total operating expenses, $m
  777
  795
  814
  836
  860
  885
  914
  943
  975
  1,008
  1,000
  1,037
  1,078
  1,121
  1,166
  1,214
  1,264
  1,317
  1,373
  1,432
  1,494
  1,560
  1,628
  1,700
  1,775
  1,855
  1,939
  2,027
  2,119
  2,216
Operating income, $m
  -8
  -7
  -5
  -3
  -1
  2
  6
  10
  14
  19
  69
  75
  82
  89
  96
  104
  113
  123
  133
  143
  155
  167
  180
  194
  208
  224
  240
  258
  277
  296
EBITDA, $m
  49
  51
  53
  55
  58
  62
  66
  70
  75
  81
  87
  94
  101
  109
  117
  126
  136
  146
  157
  169
  182
  195
  210
  225
  241
  258
  276
  296
  316
  338
Interest expense (income), $m
  32
  23
  24
  25
  26
  28
  29
  30
  32
  34
  36
  38
  40
  43
  45
  48
  51
  54
  57
  60
  64
  67
  71
  76
  80
  85
  89
  95
  100
  106
  112
Earnings before tax, $m
  -32
  -31
  -31
  -30
  -28
  -27
  -25
  -22
  -20
  -17
  31
  35
  39
  44
  49
  54
  60
  66
  72
  80
  87
  95
  104
  114
  124
  134
  146
  158
  171
  185
Tax expense, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  9
  9
  11
  12
  13
  15
  16
  18
  20
  21
  24
  26
  28
  31
  33
  36
  39
  43
  46
  50
Net income, $m
  -32
  -31
  -31
  -30
  -28
  -27
  -25
  -22
  -20
  -17
  23
  26
  29
  32
  35
  39
  43
  48
  53
  58
  64
  70
  76
  83
  90
  98
  106
  115
  125
  135

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  1,047
  1,073
  1,102
  1,135
  1,171
  1,210
  1,252
  1,298
  1,347
  1,400
  1,457
  1,517
  1,580
  1,648
  1,720
  1,796
  1,877
  1,962
  2,052
  2,146
  2,246
  2,352
  2,463
  2,580
  2,703
  2,833
  2,969
  3,113
  3,264
  3,423
Adjusted assets (=assets-cash), $m
  1,047
  1,073
  1,102
  1,135
  1,171
  1,210
  1,252
  1,298
  1,347
  1,400
  1,457
  1,517
  1,580
  1,648
  1,720
  1,796
  1,877
  1,962
  2,052
  2,146
  2,246
  2,352
  2,463
  2,580
  2,703
  2,833
  2,969
  3,113
  3,264
  3,423
Revenue / Adjusted assets
  0.734
  0.733
  0.734
  0.734
  0.734
  0.734
  0.734
  0.734
  0.734
  0.734
  0.734
  0.734
  0.734
  0.734
  0.734
  0.734
  0.734
  0.734
  0.734
  0.734
  0.734
  0.734
  0.734
  0.734
  0.734
  0.734
  0.734
  0.734
  0.734
  0.734
Average production assets, $m
  302
  309
  318
  327
  338
  349
  361
  374
  389
  404
  420
  437
  456
  475
  496
  518
  541
  566
  592
  619
  648
  678
  710
  744
  780
  817
  857
  898
  942
  987
Working capital, $m
  155
  159
  163
  168
  174
  179
  186
  192
  200
  208
  216
  225
  234
  244
  255
  266
  278
  291
  304
  318
  333
  349
  365
  383
  401
  420
  440
  462
  484
  508
Total debt, $m
  304
  317
  332
  348
  366
  386
  407
  430
  455
  481
  509
  539
  571
  605
  641
  679
  719
  762
  807
  854
  904
  957
  1,012
  1,071
  1,133
  1,197
  1,266
  1,338
  1,413
  1,493
Total liabilities, $m
  523
  536
  551
  567
  585
  605
  626
  649
  674
  700
  728
  758
  790
  824
  860
  898
  938
  981
  1,026
  1,073
  1,123
  1,176
  1,231
  1,290
  1,352
  1,416
  1,485
  1,557
  1,632
  1,712
Total equity, $m
  523
  536
  551
  567
  585
  605
  626
  649
  674
  700
  728
  758
  790
  824
  860
  898
  938
  981
  1,026
  1,073
  1,123
  1,176
  1,231
  1,290
  1,352
  1,416
  1,485
  1,557
  1,632
  1,712
Total liabilities and equity, $m
  1,046
  1,072
  1,102
  1,134
  1,170
  1,210
  1,252
  1,298
  1,348
  1,400
  1,456
  1,516
  1,580
  1,648
  1,720
  1,796
  1,876
  1,962
  2,052
  2,146
  2,246
  2,352
  2,462
  2,580
  2,704
  2,832
  2,970
  3,114
  3,264
  3,424
Debt-to-equity ratio
  0.580
  0.590
  0.600
  0.610
  0.630
  0.640
  0.650
  0.660
  0.670
  0.690
  0.700
  0.710
  0.720
  0.730
  0.750
  0.760
  0.770
  0.780
  0.790
  0.800
  0.810
  0.810
  0.820
  0.830
  0.840
  0.850
  0.850
  0.860
  0.870
  0.870
Adjusted equity ratio
  0.500
  0.500
  0.500
  0.500
  0.500
  0.500
  0.500
  0.500
  0.500
  0.500
  0.500
  0.500
  0.500
  0.500
  0.500
  0.500
  0.500
  0.500
  0.500
  0.500
  0.500
  0.500
  0.500
  0.500
  0.500
  0.500
  0.500
  0.500
  0.500
  0.500

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  -32
  -31
  -31
  -30
  -28
  -27
  -25
  -22
  -20
  -17
  23
  26
  29
  32
  35
  39
  43
  48
  53
  58
  64
  70
  76
  83
  90
  98
  106
  115
  125
  135
Depreciation, amort., depletion, $m
  57
  58
  58
  58
  59
  59
  60
  60
  61
  62
  18
  18
  19
  20
  21
  22
  23
  24
  25
  26
  27
  28
  30
  31
  33
  34
  36
  38
  39
  41
Funds from operations, $m
  26
  27
  28
  29
  31
  33
  35
  38
  41
  45
  41
  44
  48
  52
  56
  61
  66
  72
  78
  84
  91
  98
  106
  114
  123
  132
  142
  153
  164
  176
Change in working capital, $m
  3
  4
  4
  5
  5
  6
  6
  7
  7
  8
  8
  9
  9
  10
  11
  11
  12
  13
  13
  14
  15
  16
  16
  17
  18
  19
  20
  21
  22
  24
Cash from operations, $m
  22
  23
  23
  24
  25
  27
  29
  31
  34
  37
  32
  35
  38
  42
  46
  50
  54
  59
  64
  70
  76
  82
  89
  97
  105
  113
  122
  132
  142
  153
Maintenance CAPEX, $m
  -12
  -13
  -13
  -13
  -14
  -14
  -15
  -15
  -16
  -16
  -17
  -18
  -18
  -19
  -20
  -21
  -22
  -23
  -24
  -25
  -26
  -27
  -28
  -30
  -31
  -33
  -34
  -36
  -38
  -39
New CAPEX, $m
  -7
  -7
  -8
  -9
  -10
  -11
  -12
  -13
  -14
  -15
  -16
  -17
  -18
  -20
  -21
  -22
  -23
  -25
  -26
  -27
  -29
  -30
  -32
  -34
  -36
  -37
  -39
  -41
  -44
  -46
Cash from investing activities, $m
  -19
  -20
  -21
  -22
  -24
  -25
  -27
  -28
  -30
  -31
  -33
  -35
  -36
  -39
  -41
  -43
  -45
  -48
  -50
  -52
  -55
  -57
  -60
  -64
  -67
  -70
  -73
  -77
  -82
  -85
Free cash flow, $m
  3
  3
  2
  1
  1
  2
  2
  3
  4
  6
  -1
  0
  2
  3
  5
  7
  9
  12
  15
  18
  21
  25
  29
  33
  38
  43
  49
  54
  61
  67
Issuance/(repayment) of debt, $m
  11
  13
  15
  16
  18
  20
  21
  23
  25
  26
  28
  30
  32
  34
  36
  38
  40
  43
  45
  47
  50
  53
  56
  59
  62
  65
  68
  72
  76
  79
Issuance/(repurchase) of shares, $m
  44
  44
  45
  46
  46
  46
  46
  45
  44
  43
  5
  4
  3
  2
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  55
  57
  60
  62
  64
  66
  67
  68
  69
  69
  33
  34
  35
  36
  36
  38
  40
  43
  45
  47
  50
  53
  56
  59
  62
  65
  68
  72
  76
  79
Total cash flow (excl. dividends), $m
  58
  60
  62
  64
  65
  67
  69
  71
  73
  75
  32
  35
  37
  39
  41
  45
  50
  54
  60
  65
  71
  78
  84
  92
  100
  108
  117
  126
  136
  147
Retained Cash Flow (-), $m
  -44
  -44
  -45
  -46
  -46
  -46
  -46
  -45
  -44
  -43
  -28
  -30
  -32
  -34
  -36
  -38
  -40
  -43
  -45
  -47
  -50
  -53
  -56
  -59
  -62
  -65
  -68
  -72
  -76
  -79
Prev. year cash balance distribution, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
  14
  16
  16
  18
  19
  21
  23
  26
  29
  32
  4
  5
  5
  5
  5
  7
  9
  12
  15
  18
  21
  25
  29
  33
  38
  43
  49
  54
  61
  67
Discount rate, %
  6.90
  7.25
  7.61
  7.99
  8.39
  8.81
  9.25
  9.71
  10.19
  10.70
  11.24
  11.80
  12.39
  13.01
  13.66
  14.34
  15.06
  15.81
  16.61
  17.44
  18.31
  19.22
  20.18
  21.19
  22.25
  23.37
  24.53
  25.76
  27.05
  28.40
PV of cash for distribution, $m
  13
  13
  13
  13
  13
  13
  13
  12
  12
  12
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  0
  0
  0
  0
  0
  0
  0
  0
Current shareholders' claim on cash, %
  97.4
  94.8
  92.3
  89.9
  87.7
  85.5
  83.5
  81.6
  79.9
  78.3
  78.1
  78.0
  77.9
  77.8
  77.8
  77.8
  77.8
  77.8
  77.8
  77.8
  77.8
  77.8
  77.8
  77.8
  77.8
  77.8
  77.8
  77.8
  77.8
  77.8

Kratos Defense & Security Solutions, Inc. is a technology, intellectual property and proprietary product and solution company focused on the United States and its allies' national security. The Kratos Government Solutions segment includes the operations of Defense Rocket Support Services, Microwave Electronics Division, Technical and Training Solutions, and Modular Systems, which provide technology-based defense solutions, involving products and services, with the focus relating to the nation's Command, Control, Communications, Computing, Combat Systems, Intelligence, Surveillance and Reconnaissance requirements. The Unmanned Systems segment includes its unmanned aerial, ground, seaborne and command, control and communications system business. The Public Safety & Security segment provides integrated solutions for homeland security, public safety, critical infrastructure, and security and surveillance systems for government and commercial applications.

FINANCIAL RATIOS  of  Kratos Defense&Security Solutions (KTOS)

Valuation Ratios
P/E Ratio -18.8
Price to Sales 1.7
Price to Book 4.1
Price to Tangible Book
Price to Cash Flow -143
Price to Free Cash Flow -67.3
Growth Rates
Sales Growth Rate 1.8%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate -18.2%
Cap. Spend. - 3 Yr. Gr. Rate -7.1%
Financial Strength
Quick Ratio 69
Current Ratio 0
LT Debt to Equity 156.2%
Total Debt to Equity 156.5%
Interest Coverage -1
Management Effectiveness
Return On Assets -2.6%
Ret/ On Assets - 3 Yr. Avg. 0.3%
Return On Total Capital -8.7%
Ret/ On T. Cap. - 3 Yr. Avg. -4.9%
Return On Equity -23%
Return On Equity - 3 Yr. Avg. -14.9%
Asset Turnover 0.7
Profitability Ratios
Gross Margin 23%
Gross Margin - 3 Yr. Avg. 23.7%
EBITDA Margin 0.4%
EBITDA Margin - 3 Yr. Avg. 2.2%
Operating Margin -2.7%
Oper. Margin - 3 Yr. Avg. -2.8%
Pre-Tax Margin -7.8%
Pre-Tax Margin - 3 Yr. Avg. -8%
Net Profit Margin -9.1%
Net Profit Margin - 3 Yr. Avg. -5.4%
Effective Tax Rate -15.4%
Eff/ Tax Rate - 3 Yr. Avg. 1.9%
Payout Ratio 0%

KTOS stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the KTOS stock intrinsic value calculation we used $751.9 million for the last fiscal year's total revenue generated by Kratos Defense&Security Solutions. The default revenue input number comes from 0001 income statement of Kratos Defense&Security Solutions. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our KTOS stock valuation model: a) initial revenue growth rate of 2.2% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 6.9%, whose default value for KTOS is calculated based on our internal credit rating of Kratos Defense&Security Solutions, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Kratos Defense&Security Solutions.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of KTOS stock the variable cost ratio is equal to 84.6%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $125 million in the base year in the intrinsic value calculation for KTOS stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 7.9% for Kratos Defense&Security Solutions.

Corporate tax rate of 27% is the nominal tax rate for Kratos Defense&Security Solutions. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the KTOS stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for KTOS are equal to 39.3%.

Life of production assets of 23.9 years is the average useful life of capital assets used in Kratos Defense&Security Solutions operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for KTOS is equal to 20.2%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $511.5 million for Kratos Defense&Security Solutions - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 103.738 million for Kratos Defense&Security Solutions is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Kratos Defense&Security Solutions at the current share price and the inputted number of shares is $1.6 billion.

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COMPANY NEWS

▶ Kratos: 3Q Earnings Snapshot   [04:47PM  Associated Press]
▶ U.S. Air Force Prepares for a New Type of Drone Combat   [Oct-28-18 07:21AM  Motley Fool]
▶ Jim Cramer Weighs In On BlackRock, JetBlue And More   [Oct-17-18 07:03AM  Benzinga]
▶ Kratos Defense Stock Finds Itself In a Sweet Spot   [Oct-15-18 12:05PM  TheStreet.com]
▶ Kratos Receives $2.7 Million C5ISR Contract Award   [Oct-10-18 09:00AM  GlobeNewswire]
▶ Gabelli & Companys Aerospace & Defense Conference   [Aug-07-18 07:30AM  Business Wire]
▶ Kratos: 2Q Earnings Snapshot   [Aug-02-18 05:29PM  Associated Press]
▶ PHOTOS: Local defense firm unveils drone for $37 million Navy contract   [Jul-12-18 10:35AM  American City Business Journals]
▶ The Best Defense Stock to Trade for Trump's NATO Summit   [Jul-10-18 09:08AM  TheStreet.com]
▶ Kratos Receives 4-Star Supplier Award from Raytheon   [May-29-18 08:00AM  GlobeNewswire]
▶ [$$] Drones Hit Turbulence   [12:01AM  Barrons.com]
▶ 5 Defense Stocks to Tap US-North Korea Denuclearization Row   [May-17-18 03:10PM  InvestorPlace]

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