Shares of Kratos Defense & Security (NASDAQ: KTOS) climbed 10% on Friday after the midsized defense contractor won a position in the Air Force's futuristic Skyborg Vanguard Program. Kratos was already in the spotlight this week due to acquisition talk, and the Skyborg win further highlights the potential of the company's portfolio.
On Thursday evening, the Air Force said Kratos, Boeing (NYSE: BA), Northrop Grumman (NYSE: NOC), and privately held General Atomics would all move forward in the competition to develop a new artificial intelligence-backed drone. The Skyborg program is the Air Force's attempt to eventually have a fleet of unmanned aerial systems able to adapt in real time in battle.
The winner or winners will share up to $400 million to develop prototypes to experiment with small drones able to perform a range of missions.
Kratos is already a leader in drones, with its XQ-58A Valkyrie currently in trials with the Air Force and seemingly moving toward an eventual order. Skyborg is still years away from potentially moving the financial needle for Kratos, but the company's inclusion after the field was narrowed down from 18 proposals is a fresh endorsement of its technologies.
The Skyborg win is a solid potential pickup for Kratos, but the stock's move on Friday is likely based in part on speculation about one defense titan that surprisingly did not make the cut. Lockheed Martin (NYSE: LMT), maker of many of the Air Force's crewed fighters, was a surprise exclusion from Skyborg.
Lockheed also happens to be the company that was mentioned earlier in the week as a potential acquirer of Kratos. Lockheed has upward of $8 billion to spend, meaning it could easily swallow Kratos' $2.15 billion enterprise value. And in interviews, Lockheed Martin CEO James Taiclet has said he is interested in buying "pure-play" defense businesses that would expand the company's expertise in areas in which it already has a presence.
Kratos seemingly fit the bill even prior to the Skyborg awards, but with Lockheed Martin left out in the cold, Skyborg is now yet another reason a deal for Kratos would make sense.
As I said earlier in the week, deal rumors are no reason to buy into a stock, but Kratos, even without an acquisition, has a lot going for it. Skyborg only adds to Kratos' attractiveness both for investors and potentially for acquirers.
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