Kratos Set For Lift-Off Despite Early Turbulence: JPMorgan Spotlights Mid-Cap Defense Firms

J.P. Morgan analyst Seth M. Seifman expects small- and mid-cap defense firms, including Kratos Defense & Security Solutions Inc. KTOS, Leonardo DRS Inc. DRS, and Mercury Systems Inc. MRCY, to show stronger performance in the second half of 2025.

Seifman’s outlook is supported by easing concerns over budget uncertainty, supply chain disruptions, and program delays. He also cited increased efforts by the Department of Defense to expand the defense industrial base and accelerate next-generation technology initiatives.

These developments are likely to benefit firms such as Kratos, with strong growth potential, and DRS, with robust cash flow and balance sheet strength.

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Kratos Defense: Growth Acceleration Expected in H2

Seifman raised Kratos’s December 2025 price target to $44 from $33, maintaining a Neutral rating. The new valuation is based on 40 times the firm’s estimated fiscal 2027 adjusted EBITDA of $180 million, discounted back one year.

He noted short-term challenges in Kratos’ Unmanned segment and the transition of a microwave production facility, which are expected to weigh on second-quarter results. However, he projects significant growth acceleration in the second half of 2025 as major programs ramp up.

The analyst highlighted progress in Kratos’ Tactical Drone initiatives, including apparent support from Marine Corps leadership. While the company is making strides in hypersonics—especially through MACH-TB 2.0—and may secure contracts under programs like Anaconda, Helios, and Vulcan, Seifman believes much of this potential is already reflected in the current share price.

Leonardo DRS: Poised to Outperform Peers

For Leonardo DRS, Seifman raised the December 2025 price target to $48 from $33, maintaining a Neutral rating. The updated target is based on 40 times the 2026 adjusted EPS estimate of $1.21.

While the EPS estimate remains unchanged, strong first-quarter results suggest DRS could exceed its 2025 revenue guidance. Seifman sees margin improvement and believes the company deserves a valuation premium over larger peers due to its stronger growth profile.

He also views DRS as well-positioned to benefit from the U.S. government’s increased focus on shipbuilding, including potential opportunities in submarine systems. Its healthy balance sheet, he added, gives the company strategic flexibility for mergers, acquisitions, and potential capital returns.

Mercury Systems: Recovery Taking Shape

Seifman raised his December 2025 price target on Mercury Systems to $56 from $48 while maintaining a Neutral rating. The valuation is based on 20 times the estimated 2026 EBITDA of approximately $180 million.

The analyst noted lingering concerns about Mercury’s execution and the long-term impact of prior missteps. However, fiscal 2025 could mark a turning point.

Seifman expects a book-to-bill ratio of 1.1 for the year, supported by $33 million in new orders.

Margin expansion remains a key focus. In line with company guidance, Seifman forecasts a 14% adjusted EBITDA margin in the fourth quarter and 11.8% for the full year. He expects margins to improve to 16% in 2026 and approach 20% over the longer term.

Price Action: KTOS trading higher by 2.06% at $42.09, DRS lower by 0.33% at $45.17, and MRCY down by 0.04% at $51.55 at the last check Monday.

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