Kratos Defense & Security Solutions, a company often associated with cutting-edge military technology like unmanned aerial drones and hypersonic vehicles, might not immediately scream "value investment." But a closer look at their recently released financial data (https://www.kratosdefense.com/investor-relations) reveals a compelling narrative, a story of strategic growth and burgeoning profitability that's flying under Wall Street's radar. While analysts are fixated on the company's advancements in futuristic weaponry, they seem to be overlooking a crucial shift happening within Kratos: the remarkable growth of its Microwave Electronics Division.

This division, led by industry veteran Yonah Adelman, focuses on developing and manufacturing sophisticated microwave electronic products vital for a range of applications, including missile guidance systems, radar systems, missile defense, and even space and satellite communications. It's a segment that, while less flashy than the drone-filled skies of the Unmanned Systems Division, holds immense potential in a world increasingly reliant on advanced electronic warfare capabilities.

What's particularly intriguing is that the Microwave Electronics Division's growth appears to be outpacing the overall company's growth. This is a crucial point that most analysts seem to be missing. While Kratos's quarterly revenue growth YOY sits at a respectable 19.6%, we hypothesize that a significant chunk of this growth is fueled by the Microwave Electronics Division. And this is where the hidden gem reveals itself.

Kratos Defense Revenue Growth (2019 - 2023)

The chart below shows the consistent revenue growth of Kratos Defense over the past few years. While exact figures for the Microwave Electronics Division are unavailable, its impact on overall company revenue is hypothesized to be significant.

Looking back at the financials, we see a consistent pattern of increasing revenue for Kratos over the past few years. In 2019, their total revenue was $717.5 million. This figure jumped to $811.5 million in 2021, and then to $898.3 million in 2022. The trend continued in 2023, with Kratos reporting $1.037 billion in total revenue, marking a significant milestone as they crossed the billion-dollar mark.

However, pinpointing the exact revenue contribution of the Microwave Electronics Division is currently impossible as Kratos doesn't provide a segment-wise revenue breakdown in its publicly released financial data. This lack of transparency, perhaps unintentional, might be contributing to the market's underappreciation of the division's true value.

But the evidence is there. We can see the division's impact in the overall company's gross profit. Kratos reported a gross profit of $226 million for the trailing twelve months, a healthy increase from previous years. We hypothesize that this gross profit surge is, at least partially, driven by the higher-margin products typically associated with the Microwave Electronics Division.

Further supporting this hypothesis is the fact that Kratos's earnings per share have been consistently improving in recent quarters. This is a clear indicator of rising profitability. The company reported EPS of $0.06 in the first quarter of 2023, followed by $0.09, $0.12, and $0.11 in subsequent quarters. This upward trajectory suggests a positive shift in Kratos's business fundamentals, a shift we believe is significantly influenced by the Microwave Electronics Division.

While a 23.64 target price set by Seth Seifman of JPMorgan is encouraging, it still doesn't fully capture the potential we see brewing in the Microwave Electronics Division. As this division continues its quiet but impactful growth, it's poised to become a key driver of Kratos's overall profitability. And once the market catches wind of this hidden gem, we expect to see a much more bullish sentiment reflected in Kratos's stock price.

"Kratos, originally named Wireless Facilities Inc., wasn't always a defense contractor. They started out building infrastructure for the burgeoning wireless industry in the late 1990s. It was only through strategic acquisitions and a shift in focus that they transformed themselves into the defense and security powerhouse they are today. This history demonstrates Kratos's agility and adaptability, traits that bode well for their future as they continue to navigate the ever-evolving landscape of the global defense industry."

Kratos's Unique Supersonic Drone Capability

A lesser-known fact: Kratos is one of the few companies in the world capable of producing target drones that can fly at supersonic speeds. These drones, used to simulate enemy aircraft in military training exercises, are crucial for preparing armed forces for modern warfare. This unique capability further highlights Kratos's innovative edge and its ability to cater to the specific needs of its defense customers.

The story of Kratos Defense & Security Solutions is far from over. As the world grapples with increasing geopolitical tensions and the ever-present threat of cyberwarfare, Kratos's expertise in advanced defense technologies will only become more valuable. But while the world watches the dramatic ballet of drones and hypersonic missiles, remember the silent power of microwave electronics. It's a hidden gem, a potent engine of profitability, and it might just be the key to unlocking Kratos's true potential in the years to come.

"Fun Fact: Kratos's XQ-58 Valkyrie, an experimental stealth drone, has been dubbed a "loyal wingman" for its ability to operate autonomously alongside manned fighter jets. This technology could revolutionize aerial combat by providing support and expanding the capabilities of traditional fighter squadrons."