Key Points
Kratos will participate in the Department of Defense Drone Dominance Program.
25 defense companies will compete for up to $1.1 billion in defense contracts.
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Kratos Defense & Security (NASDAQ: KTOS) stock declined 3% through 11:05 a.m. ET Tuesday -- on apparently good news.
Kratos announced this morning that the U.S. Department of Defense has picked it "to participate in the initial Phase 1 Gauntlet for the Office of the Secretary of War's Drone Dominance Program."
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"Drone Dominance" sure sounds like a good contract for a military drones stock like Kratos to win! So why is Kratos stock down today?
Image source: Getty Images.
What is the "Drone Dominance Program"?
Kratos calls the Pentagon's Drone Dominance Program (DDP) a "$1.1 billion investment in groundbreaking unmanned systems technologies," aiming to recruit defense contractors to produce "approximately 350,000" military drones. The Pentagon clarifies that DDP will acquire "low-cost attack drones."
Those are big-sounding numbers. Actual contracts may be less impressive given the military's focus on "low-cost." One notable award to iFlight under DDP last month, for example, was valued at just $5.2 million -- too small to even be reported on the Pentagon's daily digest of contract awards.
What is a "Phase 1 Gauntlet"?
DDP will be rolled out in "four independent phases over the next 2 years." Each phase is a "gauntlet" in which the Pentagon whittles down the number of defense contractors bidding for its business.
25 companies will compete in the Phase 1 Gauntlet, but only 12 will win contracts. These winners are expected to be awarded contracts for 30,000 drones in total, costing $5,000 each on average -- $150 million total, or about $12.5 million per company.
What's next for Kratos?
Three more Gauntlets will follow, shrinking the field to five finalists who will split a contract for 150,000 drones priced at $2,300 each -- $345 million total, $69 million per winner.
With any luck, one of those winners will be named "Kratos."
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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Kratos Defense & Security Solutions. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
