Buy Kratos shares because drones are the future, Goldman says

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Kratos Defense and Security Solutions

is a small-cap aerospace and defense company that builds, among other high-tech products, unmanned aerial vehicles, or drones.

Its range of products evokes science fiction. This could be one of the reasons why stocks are trading at a higher valuation. Kratos shares (ticker: KTOS) are trading for around 42 times the estimated earnings for 2020, a significant bonus for peers. Aerospace stocks in the
S & P 500,
in comparison, trade accounts for about 15 times estimated earnings for 2020.

Despite the above-average valuation, Goldman Sachs analyst Noah Poponak Share upgrade to buy from hold and increased its price target to $ 26 per share, 35% above recent levels.

Poponak is confident that sales growth will accelerate next year.

Kratos "has subscribed to many high-growth programs and also has an important portfolio of opportunities," he wrote in a research report released on Friday. "However, the vast majority of these elements have never been contributors in 2018 or 2019, but rather in 2020 and beyond."

Poponak indicates that upcoming programs are important in relation to the size of the business. "We see [sales growth excluding acquisitions] ranging from 23% to 30% each from 2021 to 2023. "

It is interesting to note that Poponak also assigns a rank of 2 to mergers and acquisitions on the Kratos stock. The M & A ranking is a Goldman Sachs scale that estimates the likelihood that a company will enter an M & A transaction in the near future. The scale ranges from 1 to 3, and 2 represents an "average" probability or a 15% to 30% probability that a transaction will occur. Apparently, other aerospace and defense companies may be interested in growing sales of Kratos.

Or maybe peers want access to unusual technology and program names. Kratos, to begin with, is the personification of force in the Greek myth. Some Kratos program names include: Thanatos, probably for a Greek god of death; Gremlins, which are drones released and recovered from the jets; as well as Valkyrie, Nordic figures who take dead in action in Valhalla.

The Kratos share rose 7.2% at the afternoon trading session after the upgrade. Stocks have risen 37% since the beginning of the year, which is higher than the 21% gain in aerospace and defense stocks in the S & P 500. aerospace Barron tracks, which exclude
Boeing

(BA) because of its recent struggles related to the 737 MAX jet, have increased about 28% since the beginning of the year.

Write to Al Root at [email protected]