LMT vs. KTOS: Which Defense Stock Is Better Positioned for 2026?

Industry Overview - Escalating global tensions, particularly in Europe and the Middle East, have heightened national security risks, prompting governments to increase defense budgets [1] - The U.S. and its allies are enhancing military expenditures to improve preparedness and develop advanced defense capabilities [1] U.S. Defense Spending Proposal - In January 2026, President Trump proposed increasing U.S. defense spending to approximately $1.5 trillion by 2027, up from about $901 billion for fiscal 2026 [2] - This increase supports major contractors like Lockheed Martin and Kratos Defense, driving higher revenues through expanded procurement orders [2] Lockheed Martin (LMT) Insights - Lockheed Martin is a leading U.S. defense contractor with a focus on large-scale programs, including the F-35, which accounted for nearly 27% of total net sales in 2025 [5] - The company has delivered 1,293 F-35 airplanes, with a backlog of 368 jets as of December 31, 2025, indicating strong future sales potential [5] - The proposed budget increase suggests a favorable long-term funding outlook for defense programs, which could enhance order visibility and revenue growth for Lockheed Martin [6] Kratos Defense (KTOS) Insights - Kratos Defense specializes in unmanned aerial systems and has secured multiple contracts with the U.S. military, leading to revenue growth in its Unmanned Systems segment, which generated $68.5 million in Q4 2025 [7][8] - The company benefits from a shift towards modern, autonomous technologies, with key wins in drone production and hypersonic testing contracts driving substantial government funding [8] Earnings Growth Estimates - The Zacks Consensus Estimate indicates Lockheed Martin's EPS will increase by 28.94% in 2026 and 8.53% in 2027 [9] - In contrast, Kratos Defense's EPS is expected to grow by 32.73% in 2026 and 47.52% in 2027, reflecting stronger growth potential [12] Valuation and Debt Comparison - Lockheed Martin's shares trade at a forward Price/Sales ratio of 1.94X, while Kratos Defense trades at 9.35X [13] - Kratos Defense has no debt, while Lockheed Martin has a total debt to capital ratio of 76.35%, indicating better debt management for Kratos [14] Stock Performance - Over the past year, Lockheed Martin's shares have risen by 50.5%, while Kratos Defense has seen a significant increase of 263.3% [15] Investment Recommendation - Kratos Defense is favored due to its superior earnings growth, better debt management, and strong stock performance compared to Lockheed Martin [18]