Episode Details

Kratos Defense (KTOS) Q2 2026 — Reported Aug 4, 2026 for Q2 2026, the quarter ended June 28. Revenue $458.8M, +30.5% YoY (+19.1% organic), vs ~$410.4M consensus. Adjusted EPS $0.21 vs $0.14 expected. GAAP EPS $0.02. Adjusted EBITDA $38.2M. FY26 revenue guide raised to $1.75-1.81B. KTOS closed $51.87, +5.4%. Kratos posted a double beat and raised guidance. Then we read the operating line: GAAP operating income was MINUS $1.6M, against PLUS $3.7M a year earlier. All $4.4M of net income traces to $10.2M of interest income on the $1.44B shareholders handed over in two equity offerings. Diluted shares rose 20.8%, so revenue per share grew 8.1%, not 30.5% - and the company guides FY26 free cash flow to a USE of $85-105M. THE CALL: AVOID (4/5, A REAL BUSINESS AT A PRICE ITS OWN CASH GUIDE CANNOT SUPPORT) — base-case value ~$26.0 vs ~$51.87 today. KEY METRICS: - CALL: AVOID 4/5, fair value ~$26 vs $51.87 - about 50% BELOW the price. Ten-year owner-earnings DCF (adjusted EBITDA less stock comp, less cash tax, less capex, less the working capital growth eats): revenue compounding 20% next year fading to 4%, EBITDA margin 10.8% to 14.4%, capex 7.0% to 3.5% of sales, 10% discount, 3.5% terminal = $2.60B enterprise, plus $1.30B net cash, over 187.7M shares = $20.74. Bear $10, bull $33. A 20x multiple on 2028E EBITDA cross-checks to ~$30. NONE of the nine grid cells reaches $51.87. - A DOUBLE BEAT WITH A GAAP OPERATING LOSS. Revenue $458.8M, total costs $358.7M, gross profit $100.1M; then SG&A $73.3M, R&D $13.6M, M&A $0.8M, depreciation $3.9M, amortisation $10.1M - operating income MINUS $1.6M, against PLUS $3.7M on $351.5M of revenue a year ago. Pre-tax income of $7.0M contains $10.2M of interest income (vs a $1.2M expense last year). Strip the interest and Kratos was pre-tax negative. GAAP EPS $0.02, unchanged YoY. - REVENUE +30.5%. REVENUE PER SHARE +8.1%. Diluted shares 190.1M vs 157.4M, up 20.8%. Revenue per diluted share $2.41 vs $2.23. Kratos sold 14.9M shares at $38.50 in Jun 2025 ($555.9M net) and 16.4M at $84.00 on Feb 26 2026 ($1,348.4M net); paid-in capital $2.64B to $4.05B in six months; $346.8M of that cash bought Nomad and Orbit, which is the gap between 30.5% reported and 19.1% organic. On May 20 the charter raised authorised shares from 195M to 245M. - THE COMPANY GUIDES NEGATIVE FREE CASH FLOW. FY26 adjusted EBITDA $173-176M, stock comp $60-64M, so cash EBITDA is ~$112M - LESS than the guided $125-135M of capex. Guided operating cash flow $30-50M and guided FY26 free cash flow USE of $85-105M. Q2 operating cash flow was -$11.0M; capex $17.2M; true FCF -$28.2M (Kratos reports -$18.9M by netting $9.3M of Valkyrie asset sales). H1 true FCF -$75.5M. Backlog $2.084B is 1.17x one year of revenue; funded backlog $1.572B. - MARGIN IS NOT SCALING. Adjusted EBITDA margin 8.05% to 8.33% - 28bp - on 30.5% more revenue, while SG&A grew 35.5%. Government Solutions (+36.4%, +22.0% organic, $379.7M) saw its adjusted EBITDA margin FALL, 8.88% to 8.72%; Unmanned Systems ($79.1M, +8.1% organic) rose 4.92% to 6.45%. EV $8.43B = 48x FY26 guided adjusted EBITDA, 75x cash EBITDA and 4.7x sales; Leidos trades at 0.9x sales, L3Harris 2.3x. Balance sheet is genuinely strong: $1.4376B cash, no term debt, $1.30B net cash. What to watch: Changes our mind UP: two straight quarters of positive free cash flow after capex, adjusted EBITDA margin above 11%, or a 2027 guide with capex falling in dollars. Confirms the bear: another equity raise below $60, FY26 FCF use worse than $105M, or KGS margin falling again. We would start looking under $30. We are NOT recommending shorting it. Also on YouTube: @ChargedAlpha DISCLAIMER: For informational and educational purposes only. Not financial advice. Do your own research before any investment decision.