AeroVironment, Kratos Gain on Wedbush Outperform Initiation

Wedbush initiated coverage of AeroVironment and Kratos Defense & Security Solutions with Outperform ratings, pushing shares of both companies higher Tuesday morning.

AeroVironment is "a long-term winner despite near-term noise," Wedbush analyst Michael Ciarmoli wrote in a note to clients. The firm sees the drone maker benefiting from rising global demand for unmanned systems, a trend accelerated by recent conflicts and Pentagon spending priorities. Kratos, which builds drones, jet engines, and defense electronics, got similar treatment: the Wedbush team called it well-positioned in the counter-drone and satellite communications space.

The initiations landed at a time when defense budgets are climbing across NATO and Asia-Pacific allies. The Pentagon's fiscal 2025 request includes $11.5 billion for unmanned aircraft, up from $8.4 billion five years earlier. Both AeroVironment and Kratos have direct exposure to that line item through programs like the Switchblade loitering munition and the BGM-176B missile target.

Ciarmoli's Outperform call on AeroVironment hinges on its backlog of $445 million as of January, more than half tied to multiyear contracts that provide revenue visibility into 2027. He acknowledged the stock has been volatile – it dropped 18% in the prior quarter after a guidance miss – but argued the underlying franchise is intact. "The near-term noise around supply-chain timing and contract delays creates an entry point," the analyst said.

For Kratos, Wedbush pointed to its growing role in the hypersonics testing market and a backlog that hit $1.2 billion at the end of 2024. The company's OpenSpace division, which supplies synthetic aperture radar satellites, is also gaining traction with intelligence agencies, according to the note.

AeroVironment shares rose 4.3% to $185.20 in morning trading. Kratos gained 3.7% to $27.45, trading near its 52-week high set last month.

The broader defense tech sector has been a favorite among institutional investors this year. The iShares U.S. Aerospace & Defense ETF is up 14% through Monday, outpacing the S&P 500 by roughly 500 basis points. Wedbush's new coverage suggests the firm sees room for more upside among pure-play drone and missile system suppliers, even at the elevated multiples. AeroVironment trades at 42 times trailing earnings, Kratos at 85 times – premiums that require earnings to deliver.

Wedbush set price targets of $230 for AeroVironment and $38 for Kratos. The targets imply upside of roughly 24% and 37% from Tuesday's opening prices.