How Military Contracts Work

Military defense stocks are not like consumer companies. Their revenue comes from contracts with the Department of Defense, awarded through bidding processes that favor companies with clearances, past performance, and specific technical expertise. Once a contractor is inside a program, switching costs are high, and incumbents tend to hold their position for years.

That structure is the reason defense stocks are considered steady. Revenue is predictable once a contract is signed, and the customer rarely goes away. But the same structure means growth depends on winning new programs, because existing programs only grow at the pace the Pentagon’s budget grows.

Why Multi-Year Programs Matter

The most valuable military contracts are multi-year. They lock in revenue for five years or more and give a contractor the visibility to invest in people and equipment. A single large multi-year award can transform a mid-sized company’s outlook, which is exactly what happened with Kratos Defense & Security Solutions (KTOS).

Kratos is the defense pick in Jason Simpkins’s “Galactic Supply Chain” promotion for The Crow’s Nest. Simpkins is a defense specialist with roughly two decades in financial publishing, and the pitch hangs a lot on the specific contracts Kratos has won. We covered his background in our Jason Simpkins profile.

Kratos’s Hypersonic Win

The biggest single item in Kratos’s contract book is MACH-TB, the Multi-Service Advanced Capability Hypersonic Test Bed. It is a five-year award worth roughly $1.45 billion, announced in January 2025, and it represents about a full year of the company’s current revenue all by itself.

The program makes Kratos the lead on testing hypersonic vehicles, the weapons that fly above Mach 5 and are a top Pentagon priority. Because hypersonic testing is hard and expensive, the Pentagon consolidated the work into one program and gave it to a specialist. That is the kind of multi-year, hard-to-displace contract that defines the best military defense stocks.

Kratos’s Space Force Win

The second major award is on the space side: a $446.8 million Space Force contract for missile-warning ground networks. This fits a broader Pentagon push into space, where missile warning, satellite communications, and ground control are all being modernized at once.

Kratos’s space and satellite division posted a 3-to-1 book-to-bill ratio in the first quarter, meaning it signed three dollars of new work for every dollar it shipped. Company-wide the ratio was around 1.5-to-1. Book-to-bill is the single most useful forward indicator in defense, and a 3-to-1 print in one division is a strong signal.

The Book-to-Bill Signal

Reading book-to-bill correctly is the difference between chasing a headline and understanding a defense stock. A ratio above one means the company is winning work faster than it completes it, which points to future revenue growth. A ratio below one means the opposite.

Kratos’s 3-to-1 space division number is genuinely impressive, but it is one division. The rest of the company runs closer to 1.5-to-1, which is healthy but not the same story. Investors should read the two numbers together rather than leaning on the better one. For a related look at the supplier tier, our SpaceX supplier stocks explainer covers how these companies fit the broader supply chain.

The Valuation Question

The numbers behind Kratos are worth laying out plainly. It trades above 40 times forward earnings, based on roughly $1.12 in expected next-year earnings per share, and it was bid to about 400 times earnings last December before the correction. That is a wide range, and it tells you how much of the hypersonic story the market has already priced in.

The company is growing, with 20%-plus top-line growth expected for 2027 and 2028, so this is not a story of stagnation. The question is whether paying more than 40 times forward earnings for a contractor with that growth rate is a sensible entry point. That is a judgment call the pitch skips over.

The Honest Read

On the merits, Kratos has what you want in a military defense stock: a hard-to-displace hypersonic test program, a growing space division, and a book-to-bill ratio that points to future revenue. Those are real wins, and they are the reason it anchors the Galactic Supply Chain pitch.

The catch is the same one that applies to most of these picks: the stock already trades above 40 times forward earnings after a run to roughly 400 times earnings last December. The contracts are real, and the price reflects most of the good news. That is not a reason to avoid the company, but it is a reason to be careful about the entry point. Our full Kratos breakdown walks through the numbers.

Ready to see the research? Click here to access Jason Simpkins’s report.

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