As the Q2 earnings season wraps, let’s dig into this quarter’s best and worst performers in the defense contractors industry, including Kratos (NASDAQ: KTOS) and its peers.

Defense contractors typically require technical expertise and government clearance. Companies in this sector can also enjoy long-term contracts with government bodies, leading to more predictable revenues. Combined, these factors create high barriers to entry and can lead to limited competition. Lately, geopolitical tensions–whether it be Russia’s invasion of Ukraine or China’s aggression towards Taiwan–highlight the need for defense spending. On the other hand, demand for these products can ebb and flow with defense budgets and even who is president, as different administrations can have vastly different ideas of how to allocate federal funds.

The 13 defense contractors stocks we track reported a strong Q2. As a group, revenues beat analysts’ consensus estimates by 3.4% while next quarter’s revenue guidance was in line.

Thankfully, share prices of the companies have been resilient as they are up 5.9% on average since the latest earnings results.

Kratos (NASDAQ: KTOS)

Established with a commitment to supporting national security, Kratos (NASDAQ: KTOS) is a provider of advanced engineering, technology, and security solutions tailored for critical national security applications.

Kratos reported revenues of $351.5 million, up 17.1% year on year. This print exceeded analysts’ expectations by 15%. Overall, it was a strong quarter for the company with an impressive beat of analysts’ organic revenue estimates and a solid beat of analysts’ EBITDA estimates.

Eric DeMarco, Kratos’ President and CEO, said, “A generational recapitalization of strategic weapon systems is underway, with significant global funding being committed by the U.S. and its allies, including as represented by a planned U.S. 2026 National Security spend exceeding $1 trillion, NATO committing 5% of member GDP to defense, and Asian allies looking to do the same. The Global Defense and National Security Market is currently approximately $2.5 trillion, led by the United States “peace through strength” posture and is expected to grow for the foreseeable future.

Kratos pulled off the biggest analyst estimates beat and fastest revenue growth of the whole group. Unsurprisingly, the stock is up 9% since reporting and currently trades at $64.45.

Is now the time to buy Kratos? Access our full analysis of the earnings results here, it’s free.

Best Q2: Mercury Systems (NASDAQ: MRCY)

Founded in 1981, Mercury Systems (NASDAQ: MRCY) specializes in providing processing subsystems and components for primarily defense applications.

Mercury Systems reported revenues of $273.1 million, up 9.9% year on year, outperforming analysts’ expectations by 11.9%. The business had an incredible quarter with a solid beat of analysts’ organic revenue estimates and a beat of analysts’ EPS estimates.

The market seems happy with the results as the stock is up 30.3% since reporting. It currently trades at $70.

Is now the time to buy Mercury Systems? Access our full analysis of the earnings results here, it’s free.

Weakest Q2: Lockheed Martin (NYSE: LMT)

Headquartered in Maryland, Famous for the F-35 aircraft, Lockheed Martin (NYSE: LMT) specializes in defense, space, homeland security, and information technology products.

Lockheed Martin reported revenues of $18.16 billion, flat year on year, falling short of analysts’ expectations by 2.3%. It was a softer quarter as it posted full-year EPS guidance missing analysts’ expectations significantly and a significant miss of analysts’ adjusted operating income estimates.

The stock is flat since the results and currently trades at $463.87.

Read our full analysis of Lockheed Martin’s results here.

Northrop Grumman (NYSE: NOC)

Responsible for the development of the first stealth bomber, Northrop Grumman (NYSE: NOC) specializes in providing aerospace, defense, and security solutions for various industry applications.

Northrop Grumman reported revenues of $10.35 billion, up 1.3% year on year. This print topped analysts’ expectations by 3%. Overall, it was an exceptional quarter as it also logged a solid beat of analysts’ EBITDA estimates and an impressive beat of analysts’ adjusted operating income estimates.

The stock is up 12.1% since reporting and currently trades at $577.25.

Read our full, actionable report on Northrop Grumman here, it’s free.

Leidos (NYSE: LDOS)

Formed through the split of IT services company SAIC, Leidos (NYSE: LDOS) offers technology and engineering solutions such as military training systems for the defense, civil, and health markets.

Leidos reported revenues of $4.25 billion, up 2.9% year on year. This result met analysts’ expectations. It was a strong quarter as it also put up an impressive beat of analysts’ backlog estimates and a solid beat of analysts’ EBITDA estimates.

The stock is up 10.3% since reporting and currently trades at $177.88.

Read our full, actionable report on Leidos here, it’s free.

Market Update

As a result of the Fed’s rate hikes in 2022 and 2023, inflation has come down from frothy levels post-pandemic. The general rise in the price of goods and services is trending towards the Fed’s 2% goal as of late, which is good news. The higher rates that fought inflation also didn't slow economic activity enough to catalyze a recession. So far, soft landing. This, combined with recent rate cuts (half a percent in September 2024 and a quarter percent in November 2024) have led to strong stock market performance in 2024. The icing on the cake for 2024 returns was Donald Trump’s victory in the U.S. Presidential Election in early November, sending major indices to all-time highs in the week following the election. Still, debates around the health of the economy and the impact of potential tariffs and corporate tax cuts remain, leaving much uncertainty around 2025.

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