Jason Simpkins is out with a new promo for his Secret Stock Files ($1,999 first year, renews at ?, 90-day refund period), and it’s all about AI-powered aircraft… and a small company joining the big time as it gets a bunch of new contracts. Here’s how he puts it in the intro email:

“I expect this company not only to join industry leaders like Lockheed Martin and Northrop Grumman…

“But to surpass them as its groundbreaking technology turns the entire military-industrial complex on its head…

“As it goes from being virtually unknown…

“To being the single most important defense contractor in the world.”

And he goes into a bit more detail on the order form:

“the small company behind this highly secretive DoD initiative — known as ‘Project Wingman’ could be the opportunity of a lifetime for regular investors.

“This tiny firm is currently building a completely new category of aircraft for the U.S. military, which will mark the end of an era for human pilots…

“And spark the dawn of AI ruling the skies…

“The rollout of this game-changing aircraft is happening right now in discreet hangars and in closed airspace.

“And it’s going to happen quicker than most people think…

“Setting the stage for a massive shakeup in the $133 billion aerospace and defense industry…”

And in the big “presentation” part of the ad:

“Should this company grow to the size of Lockheed Martin — as I expect it will — investors will walk away with a staggering 50x return.

“And there are many reasons why this is likely.

“To start, the company already makes key components for our nation’s most advanced fighter jets, including the F-16 and F-35, making Lockheed and others almost entirely reliant on its hardware.”

That gets pretty exciting for a while… one can just imagine this little $2-3 billion company growing up and competing with $120 billion Lockheed Martin (LMT), pouring wealth down upon our noggins.

So what’s the story?

Well, the promo is really all about the rising military interest in “collaborative combat aircraft” (CCAs), which are drones that operate at least semi-autonomously in support of a manned fighter — so picture an F-22, with a pilot, accompanied by a few CCAs that work under that pilot’s leadership or direction, with or without a ground-based drone pilot, to offer more capabilities to counter other aircraft, or hit additional targets, or just confuse air defenses. Simpkins’ pitch is basically that these CCAs can be much cheaper (maybe 1/10th the cost, maybe 1/3rd, depending on who you ask), that they can help overcome the critical pilot shortage in the Air Force and elsewhere, and that they can be built quickly, perhaps in time to help counter China’s feared ambitions in Taiwan.

And Simpkins argument that this “Project Wingman” operator will use the CCA program to launch itself into position as a major prime defense contractor is backed up by this…

“… this company, small as it is, already supplies key technology to all manner of surveillance craft, communications equipment, satellite and radar systems, space systems, and even hypersonic weapons.

“It also makes directed-energy weapons, cyber warfare software, microwave electronics, missile defense systems, and training and combat programs….

“It also supplies the components of several U.S. military assets, including:

“Patriot missile systems;

“Aegis Cruisers;

“Zumwalt-class destroyers; and

“Terminal High Altitude Area Defense (THAAD).”

We also get a few hints about recent contracts they’ve won…

“In just the last few months…

“The Navy awarded it a $47 million contract for ballistic missile systems…

“The Air Force gave it a $54 million contract to develop a low-cost expendable engine…

“And the Army recently signed a $95 million deal to buy its target drones.”

And his description of this “Project Wingman” idea:

“Human pilots won’t be completely replaced — at least not in the first stage of this technological rollout.

“Instead, they will act as ‘quarterbacks,’ calling out carefully designed plays for a team of AI-controlled support fighters.

“To be clear, these are not typical ‘drones’ that fly by remote control…

“They are an entirely new kind of combat plane called ‘Collaborative Combat Aircraft,’ or CCA.

“Their job in this initial roll-out is to support human fighters, like a team of robot wingmen….

“… at roughly 5% of the cost of a human-controlled fighter, and with no human lives to consider onboard, CCA can be deployed with limited risk.”

When is all this happening? And what would the financial impact be? More from the ad:

“Air Force Secretary Frank Kendall has already committed to purchasing 1,000 CCA…

“And says that the Air Force is prepared to dish out between $20 million and $40 million for each.

“That amounts to as much as $40 billion — or nearly 40x — the current annual revenue of the small defense contractor we’re about to uncover….

“I expect this tiny defense contractor to grow at least to the size of Lockheed Martin in the coming years.

“This company has the potential to completely corner the $133.75 billion military aircraft market, making manned fighter jets a thing of the past.”

And implies that this is all essentially a done deal, that this little company owns the CCA market…

“And of course, there is only one company leading this initiative: the obscure defense contractor I’ve been hinting at throughout this presentation.

“‘We’ve invested. They’re ready… We can deliver them either immediately or in a couple of months,’ says the company’s president.”

So what’s the reality?

Well, the reality is that a $2 billion company is not ever likely to be the prime contractor for a $40 billion program, first of all, a firm that small is unlikely to have the capacity to build 1,000 of these drones in any kind of a hurry… but we could get through that with multi-company programs, since most major defense procurement projects involve more than one subcontractor. Maybe this little company will participate in the program… or maybe, on the other hand, the program is currently small enough that there’s a chance for a smaller contractor to grow up with the program’s growth over the next decade?

That’s just my top-down thinking about the potential of the CCA program, though, and that doesn’t get us much in the way of answers… so let’s start from the bottom instead, which company is Simpkins talking about? This is a firm we’ve seen pitched a few times over the past 15 years, for other reasons (but mostly as “next-gen drones” play), Kratos Defense & Security Solutions (KTOS).

And the company has grown over the years, though it has both won and lost meaningful contracts from time to time, so, as is somewhat typical for defense contractors, the revenue doesn’t move in a straight line — KTOS today is reporting sales that are really just about the same as a decade ago. And the profitability has come in fits and starts, too — earning $50 million in a good year, losing $50 million in a bad year.

What do analysts think? Well, Kratos had about $1 billion in revenue and 42 cents per share in adjusted earnings last year, and the forecast is that they’ll hit $1.15 billion and 46 cents this year, growing revenue by about 8-10% per year and and adjusted earnings per share by about 20% per year for the next few years. They seem to think it’s in decent shape, and at $21 it’s trading just about 10% below the average price target, and at about 36X next year’s expected (adjusted) earnings. Which probably puts it in the “rational” range for valuations, though doesn’t exactly make KTOS look like a bargain.

But as you’ll note, if analysts believe they’ll only grow revenue from $1 billion last year to $1.4 billion in 2026, then they’re probably not getting $40 billion worth of “CCA” orders for this “Project Wingman” jet drone, right?

Right. Kratos did develop one of the first fighter drones, the XQ-58A Valkyrie… and the Pentagon is moving forward with the first contracts for CCA drones this year. But there’s no clear indication, so far, that Kratos will play a role in that, or that the Air Force will ever order up a bunch of Valkyries. 18 months ago Kratos pretty clearly expected to get orders in 2024… but so far, no dice.

Back in March, the expectation was that the Air Force would be planning for roughly $29 billion over the next five years on the Next Generation Air Dominance fighter program, with roughly 2/3 of that for the next wave of new fighters, and 1/3 for the CCA drones that would accompany them — penciling in a price of a few hundred million dollars for each new fighter, and roughly $30 million for each CCA drone. But they’re still in the first phase of deciding who the prime contractors will be, and finalizing the designs of the first aircraft — which means they’re budgeting $570 million for the CCA program for the next fiscal year, and they expect to award “developmental” contracts for the next phase of CCA procurement to two or three companies.

Back in April, they narrowed it down to two companies for the first phase of CCA development, the private startup Anduril, and General Atomics, with the indication that maybe both will get initial orders in September or October, when the Development Contracts are awarded. There’s a possibility that Kratos could participate in that contract as a subcontractor, but they don’t have anywhere near the capacity of General Atomics, so I wouldn’t count on that being meaningful — and the Marine Corps is apparently testing the Valkyrie, but the indications seem to be that the government decided it was too small for the CCA program (and Boeing’s X-45 too big), so Anduril and General Atomics are phase 1. There is some chance that Kratos could participate in the next wave of investment in CCA capabilities, which will start next year, and Kratos isn’t talking about it but they generally imply that they’ll try to participate in any and all drone programs.

So yes, Kratos is a small defense contractor, and there’s some chance that a major investment in the CCA program over the next five years could lead to more Kratos contracts, and it’s possible that their current product, the Valkyrie, could get chosen for some other needs… but I don’t see where Simpkins can logically come to the conclusion that Kratos will dominate the CCA “Wingman” market, since many of the major defense contractors have been involved with competing for this first CCA contract, and Kratos hasn’t seen their CCA product move forward in the Air Force competition to this point, even though they were clearly expecting to be a pretty quick beneficiary last year, and maybe got out over their skis since they invested in expanding their Valkyrie manufacturing capacity to be ready for those haven’t-appeared-yet orders. My reading of the situation is that when it comes to CCA drones, Kratos is licking its wounds and waiting for details on the next (contract) fight, so they can jump in and try again.

I may be misinterpreting the situation, and the orders might come, maybe there will even be a surprise and Kratos will participate in one of the contracts that gets awarded this Fall… but since there are already two likely recipients for this first award who have already been named as the finalists, I don’t see any reason to expect Kratos to receive big news this year on that front — presumably they’ll try for part of the next phase of Air Force investment in CCA programs and similar drones, which we should see details about sometime next year, and there will probably be lots of other (mostly smaller) drone programs getting funding and moving forward in various degrees over the next several years. Maybe someone else will order some Valkyries.

In the meantime, they’re chugging along — Kratos’ drone work started with target drones, for training, and those are still being produced, and they’re also active in other areas of next-gen training for the military, as well as space systems, missile defense, hypersonic programs, and other areas, often as a component supplier or subcontractor. It’s been a slowish-growth business, with ups and downs, and they were clearly hoping to invest in greater production of CCA drones and get some early orders, but that hasn’t happened yet, and they don’t have a particularly big order backlog. Which is probably why the analysts expect pretty ordinary revenue and earnings growth. It might work out, but expecting 50X returns seems really, really optimistic, and probably would depend on them winning some much larger contracts over the next 2-3 years to very rapidly scale up… and then also having a couple great decades after that.

I like the idea of a small and nimble defense contractor getting a bigger piece of the pie with new, modern weapons programs… but it looks like Anduril, which is private and in some ways is a startup, but is also now valued at $14 billion, might have leapfrogged Kratos at this point, with another $1.5 billion venture capital funding round this summer to fund a massive manufacturing investment… and with what looks likely to be a shared CCA contract award with General Atomics.

That’s just my thinking, though, and with your money you get to make the call… feel free to share your opinion (or questions) in the friendly little comment box below.

P.S. Simpkins also promises some bonus “special reports” if you sign up for his newsletter, and one of them is touting a “Retinal Matrix” stock — we covered that Retinal Matrix pitch, which turned out to be Kopin, back in the Spring of 2023. Don’t know if he’s updated his previous promise of “26,221% gains” from that stock (the little tease on the order form just calls it a “potential 30,000% winner”)… but if you bought back then, you’d be sitting on a 12% loss today.

Disclosure: I am not invested in any of the companies mentioned above. I will not trade in any covered stock for at least three days after publication, per Stock Gumshoe’s trading rules.