As the Q4 earnings season comes to a close, it’s time to take stock of this quarter’s best and worst performers in the defense contractors industry, including Kratos (NASDAQ: KTOS) and its peers.
Defense contractors typically require technical expertise and government clearance. Companies in this sector can also enjoy long-term contracts with government bodies, leading to more predictable revenues. Combined, these factors create high barriers to entry and can lead to limited competition. Lately, geopolitical tensions–whether it be Russia’s invasion of Ukraine or China’s aggression towards Taiwan–highlight the need for defense spending. On the other hand, demand for these products can ebb and flow with defense budgets and even who is president, as different administrations can have vastly different ideas of how to allocate federal funds.
The 14 defense contractors stocks we track reported a mixed Q4. As a group, revenues beat analysts’ consensus estimates by 2.6% while next quarter’s revenue guidance was 4.3% above.
In light of this news, share prices of the companies have held steady as they are up 1.7% on average since the latest earnings results.
Kratos (NASDAQ: KTOS)
Established with a commitment to supporting national security, Kratos (NASDAQ: KTOS) is a provider of advanced engineering, technology, and security solutions tailored for critical national security applications.
Kratos reported revenues of $283.1 million, up 3.4% year on year. This print fell short of analysts’ expectations by 1.7%. Overall, it was a slower quarter for the company with full-year EBITDA guidance missing analysts’ expectations.
Eric DeMarco, Kratos’ President and CEO, said, “Kratos’ full year 2024 and fourth quarter demonstrated once again that we can significantly organically grow the business, and make sizable internally funded investments, positioning the Company for accelerating future growth, while also generating significant, positive operating cash flow. We have recently received several large new program and contract awards, including in the hypersonic, target drone, jet engine, rocket, and satellite system areas, enabling us to increase our expected revenue growth rate for 2026 to a range of 13 percent to 15 percent above our current 2025 financial forecast that we provided today, which includes 10 percent growth over 2024. Kratos’ fourth quarter 1.5 to 1.0 book to bill ratio and our $12.4 Billion opportunity pipeline also provides confidence in our expected accelerating future growth trajectory, with increased margins.”
Interestingly, the stock is up 24.9% since reporting and currently trades at $31.39.
Read our full report on Kratos here, it’s free.
Best Q4: Mercury Systems (NASDAQ: MRCY)
Founded in 1981, Mercury Systems (NASDAQ: MRCY) specializes in providing processing subsystems and components for primarily defense applications.
Mercury Systems reported revenues of $223.1 million, up 13% year on year, outperforming analysts’ expectations by 23.9%. The business had an incredible quarter with an impressive beat of analysts’ organic revenue estimates and a solid beat of analysts’ EPS estimates.
Mercury Systems achieved the biggest analyst estimates beat among its peers. The market seems happy with the results as the stock is up 7.3% since reporting. It currently trades at $45.18.
Is now the time to buy Mercury Systems? Access our full analysis of the earnings results here, it’s free.
Weakest Q4: AeroVironment (NASDAQ: AVAV)
Focused on the future of autonomous military combat, AeroVironment (NASDAQ: AVAV) specializes in advanced unmanned aircraft systems and electric vehicle charging solutions.
AeroVironment reported revenues of $167.6 million, down 10.2% year on year, falling short of analysts’ expectations by 10.9%. It was a disappointing quarter as it posted full-year revenue guidance missing analysts’ expectations.
AeroVironment delivered the weakest performance against analyst estimates, slowest revenue growth, and weakest full-year guidance update in the group. As expected, the stock is down 2.2% since the results and currently trades at $138.97.
Read our full analysis of AeroVironment’s results here.
Leonardo DRS (NASDAQ: DRS)
Developing submarine detection systems for the U.S. Navy, Leonardo DRS (NASDAQ: DRS) is a provider of defense systems, electronics, and military support services.
Leonardo DRS reported revenues of $981 million, up 5.9% year on year. This print beat analysts’ expectations by 4.9%. It was a very strong quarter as it also recorded an impressive beat of analysts’ adjusted operating income estimates and full-year revenue guidance beating analysts’ expectations.
The stock is up 15.5% since reporting and currently trades at $34.09.
Read our full, actionable report on Leonardo DRS here, it’s free.
Leidos (NYSE: LDOS)
Formed through the split of IT services company SAIC, Leidos (NYSE: LDOS) offers technology and engineering solutions such as military training systems for the defense, civil, and health markets.
Leidos reported revenues of $4.37 billion, up 9.7% year on year. This number surpassed analysts’ expectations by 5.6%. Overall, it was an exceptional quarter as it also logged a solid beat of analysts’ backlog estimates.
The stock is down 2.2% since reporting and currently trades at $139.64.
Read our full, actionable report on Leidos here, it’s free.
Market Update
In response to the Fed’s rate hikes in 2022 and 2023, inflation has been gradually trending down from its post-pandemic peak, trending closer to the Fed’s 2% target. Despite higher borrowing costs, the economy has avoided flashing recessionary signals. This is the much-desired soft landing that many investors hoped for. The recent rate cuts (0.5% in September and 0.25% in November 2024) have bolstered the stock market, making 2024 a strong year for equities. Donald Trump’s presidential win in November sparked additional market gains, sending indices to record highs in the days following his victory. However, debates continue over possible tariffs and corporate tax adjustments, raising questions about economic stability in 2025.
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