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Kratos Defense & Security Solutions, Inc. (KTOS) vs. Natera, Inc. (NTRA): Which is the Better Investment?

Kratos Defense & Security Solutions, Inc. (NASDAQ:KTOS) shares are up more than 37.58% this year and recently increased 0.90% or $0.13 to settle at $14.57. Natera, Inc. (NASDAQ:NTRA), on the other hand, is up 179.98% year to date as of 09/11/2018. It currently trades at $25.17 and has returned -9.26% during the past week.

Kratos Defense & Security Solutions, Inc. (NASDAQ:KTOS) and Natera, Inc. (NASDAQ:NTRA) are the two most active stocks in the Security & Protection Services industry based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.

Growth

One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect KTOS to grow earnings at a 13.00% annual rate over the next 5 years.

Profitability and Returns

Growth doesn’t mean much if it comes at the cost of weak profitability. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. Kratos Defense & Security Solutions, Inc. (KTOS) has an EBITDA margin of 0.79%. This suggests that KTOS underlying business is more profitable KTOS’s ROI is -6.80% while NTRA has a ROI of -90.50%. The interpretation is that KTOS’s business generates a higher return on investment than NTRA’s.

Cash Flow



The amount of free cash flow available to investors is ultimately what determines the value of a stock. KTOS’s free cash flow (“FCF”) per share for the trailing twelve months was -0.09. Comparatively, NTRA’s free cash flow per share was -0.66. On a percent-of-sales basis, KTOS’s free cash flow was -0% while NTRA converted -0.02% of its revenues into cash flow. This means that, for a given level of sales, KTOS is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Liquidity and leverage ratios are important because they reveal the financial health of a company. KTOS has a current ratio of 2.90 compared to 1.70 for NTRA. This means that KTOS can more easily cover its most immediate liabilities over the next twelve months.

Valuation

KTOS trades at a forward P/E of 44.02, a P/B of 2.99, and a P/S of 2.18, compared to a P/S of 6.56 for NTRA. KTOS is the cheaper of the two stocks on sales basis but is expensive in terms of P/E and P/B ratio. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. KTOS is currently priced at a -0.41% to its one-year price target of 14.63. Comparatively, NTRA is 8.07% relative to its price target of 23.29. This suggests that KTOS is the better investment over the next year.

Insider Activity and Investor Sentiment

Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. KTOS has a short ratio of 13.71 compared to a short interest of 1.55 for NTRA. This implies that the market is currently less bearish on the outlook for NTRA.

Summary




Kratos Defense & Security Solutions, Inc. (NASDAQ:KTOS) beats Natera, Inc. (NASDAQ:NTRA) on a total of 8 of the 14 factors compared between the two stocks. KTOS is growing fastly, is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and higher liquidity. KTOS is more undervalued relative to its price target. Finally, MNGA has better sentiment signals based on short interest.

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