J.P. Morgan moved Kratos Defense & Security Solutions to an "overweight" recommendation from a prior "neutral" stance while cutting its December 2026 price target to $82 from $99. The change in view came as Kratos shares had declined 23% year-to-date versus a 9% gain for the S&P 500, and the upgrade corresponded with more than a 3% jump in the stock in pre-market trading.
The firm set the $82 target by applying a 6.5-times multiple to its 2027 sales estimate of $2.2 billion. J.P. Morgan noted that this multiple sits toward the high end of the mid-single digit sales multiples it assigns to next-generation defense companies, and that the target represents roughly 40% upside from Kratos' June 11 closing price of $58.78.
On the drivers behind the recommendation, J.P. Morgan said: "The market is awarding a premium to fastgrowing defense companies and within that group, Kratos has distinguished itself by winning and executing new work, partnering with the industry’s biggest players, providing more affordable high-end systems, and investing ahead of need, which is what DoD wants contractors to do."
J.P. Morgan's revenue forecast for Kratos calls for $1.76 billion in fiscal 2026, representing year-over-year growth of 30.7%, and an increase to $2.2 billion in 2027. Those figures imply a compound annual growth rate above 20% through 2028, according to the broker's models.
Near-term adjusted earnings per share estimates were trimmed. J.P. Morgan lowered adjusted EPS to $0.82 for 2026 from $0.85, and to $1.12 for 2027 from $1.24.
Some operational data from the first quarter of fiscal 2026 provided what the broker described as near-term de-risking. Kratos Unmanned Systems recorded $20 million in Valkyrie drone sales in the quarter, a level J.P. Morgan referred to as a high-water mark for the year relative to the broker's full-year model of $305 million.
Kratos Government Solutions reported organic growth of 24% for fiscal 2026, supplemented by approximately $145 million in inorganic revenue stemming from the acquisitions of Orbit and Nomad, J.P. Morgan noted.
For hypersonics, the broker's model envisions roughly $200 million, $400 million and $700 million in revenue across 2025 through 2027, and it cited management expectations for an additional $1 billion sole-source award.
Production plans for Kratos' turbojet engines were also highlighted. J.P. Morgan expects turbojet output to reach 3,000 units in 2027 before increasing to between 5,000 and 6,000 units in 2028. The firm's write-up added that space ground stations posted a 3.0 times book-to-bill ratio in the most recent quarter.
Cash flow remains an area of concern. J.P. Morgan forecasts a free cash outflow of approximately $98 million in 2026, an improvement from a $133 million outflow in 2025. The broker attributes the cash flow pressure in part to capital expenditures of $165 million, equal to 9.4% of sales in their model.
Following an equity raise in February, Kratos had $1.5 billion of cash on the balance sheet as of March 31, 2026, the broker reported.
Profitability metrics in J.P. Morgan's model call for adjusted EBITDA margins of 9.9% in 2026 and 11.1% in 2027. Based on the broker's estimates, the stock was trading at 71.8 times 2026 adjusted earnings and at 47.4 times 2026 EV/EBITDA.
J.P. Morgan identified downside risks that could undermine the thesis, including execution risk, competitive pressure in tactical drones, and further delays in cash flow generation. These factors were noted as potential limits to upside unless performance and cash conversion improve.
Summary
J.P. Morgan upgraded Kratos to overweight and lowered its December 2026 price target to $82, valuing the company at 6.5 times its projected 2027 sales of $2.2 billion. The broker models robust revenue growth through 2027 but trimmed adjusted EPS for 2026 and 2027 and highlighted ongoing free cash flow pressures driven by elevated capital spending. Key operational markers include strong Valkyrie drone sales in Q1, rapid turbojet production ramp plans, hypersonics revenue progression, and a healthy book-to-bill for space ground stations.
Key points
- Broker upgrade to overweight with a lowered December 2026 price target of $82; target equals 6.5x J.P. Morgan's 2027 sales estimate of $2.2 billion and implies about 40% upside from the June 11 close of $58.78.
- Revenue projected at $1.76 billion in fiscal 2026 (up 30.7% year-over-year) and $2.2 billion in 2027, suggesting a compound annual growth rate above 20% through 2028; adjusted EPS reduced to $0.82 in 2026 and $1.12 in 2027.
- Operational progress includes $20 million in Valkyrie drone sales in Q1 against a $305 million full-year model, 24% organic growth in Kratos Government Solutions plus $145 million from Orbit and Nomad acquisitions, and targeted turbojet production of 3,000 units in 2027 scaling to 5,000-6,000 in 2028.
Risks and uncertainties
- Execution risk - the company's ability to convert wins into sustained revenue and margin improvement is not guaranteed, affecting defense and aerospace sector participants.
- Competition in tactical drones - increased rivalry could pressure market share and pricing for unmanned systems.
- Cash flow generation - continued delays in moving to positive free cash flow would strain financial flexibility, relevant to investors and creditors monitoring funding and capital allocation.
For readers tracking market exposure, the report's implications touch the defense and aerospace supply chain, unmanned systems, hypersonics programs, space infrastructure, and financial markets assessing valuation and cash conversion for growth-oriented defense contractors.