KTOS - Valens Credit Report - 2021 05 25
Credit markets are materially overstating KTOS' credit risk with a YTW of 3.964% relative to an Intrinsic YTW of 1.804% and an Intrinsic CDS of 97bps. Moody's is also materially overstating the firm's fundamental credit risk, with its highly speculative B1 credit rating six notches lower than Valens' IG4+ (Baa1) credit ratingIncentives Dictate Behavior™ analysis highlights mixed signals for credit holders. Management's compensation framework should drive them to focus on improving all three value drivers, margins, top-line growth, and asset utilization, which should lead to Uniform ROA improvement and higher cash flows available for servicing obligations. In addition, management members are material owners of KTOS equity relative to their annual compensation, indicating they should be well-aligned with shareholders for long-term value creation
Earnings Call Forensics™ of the firm's Q1 2021 earnings call (05/05) highlights that management generated an excitement marker when saying the United States Navy is moving towards driving an air wing that is at least 50% or more unmanned. Also, they are confident Skyborg program testing will continue to increase
Kratos Defense & Security Solutions is a technology, intellectual property, proprietary product and system company focused on the U.S. and its allies' national security. The company operates in three segments. The Kratos Government Solutions segment is comprised of an aggregation of operating segments, including the company's microwave electronic products, space and satellite communications, modular systems and rocket support operating segments. The Unmanned Systems segment consists of the company's unmanned aerial system and unmanned ground and seaborne system businesses. The Public Safety and Security segment provides independent integrated solutions for government and commercial applications.
In 2009, just as the dust was settling from the last major equity and credit market crises, we launched a boutique research firm with the intention of breaking Wall Street’s biases and broken incentives:
- GAAP and IFRS have failed to provide rules for reliable financial statement reporting
- Stock analyst recommendations are not grounded in disciplined financial analysis
- Credit agencies have been set up to grossly fail in their responsibilities to investors and the public markets
- Utter lack of willingness of major research firms to employ the the most advanced forensic analysis available
We sought to provide investors and company analysts with a source of information that changed all that.
Many years later, our business model remains because little has changed on Wall Street.
- Corporate credit ratings remain years behind the fundamental underpinnings of company performance
- Stock analysts continue to make recommendations with deeply inherent biases
- Research firms have failed to break down the walls between credit, equity, and macroeconomic research
- The governing accounting bodies have created more leeway for mis-estimates and mis-classifications as financials have become unwieldy and overwhelming
The integrity of Valens Research is founded in our disciplined processes and analytics. No “star” analysts. No corporate advisory relationships. No-nonsense opinions and recommendations.
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