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Defense

Who Actually Builds the Targets: The Overlooked Business Inside Kratos

Missiles get the headlines, but every live-fire test needs something to shoot at first — and Kratos has quietly cornered that recurring, sole-sourced business for over a decade.

Image: Money Racket
By at Money Racket · Jun 23, 2026

The mechanism. Every time the Pentagon fields a new interceptor, radar, or air-defense system, doctrine and law require it be shot at something real before it reaches troops. The Livermore-style "fly before you buy" mandate — rooted in the 1986 Live Fire Test and Evaluation statute and enforced by DOT&E — means every SM-6, PAC-3, NASAMS, or next-gen missile-defense round needs an aerial target drone to intercept. That target business is unglamorous, recurring, largely sole-sourced, and almost entirely owned by one contractor: Kratos Defense (KTOS). Its BQM-167 (mimicking fighter jets) and BQM-177 (mimicking anti-ship cruise missiles) have racked up sole-source Air Force and Navy contracts for over a decade — Lot 20 alone was a $79.8 million sole-source award. Unlike a missile sale, which is lumpy and program-specific, target-drone demand tracks the entire live-fire testing tempo of the U.S. military — it scales with every system tested, not one weapon's fate.

Who cashes in:

Target-drone demand doesn't track one weapon's fate — it tracks the entire live-fire testing tempo of the U.S. military, and Kratos owns nearly all of it.
  • Kratos (KTOS) — the target franchise (BQM-167, BQM-177, MQM-178 Firejet, and the emerging 5th-Gen Aerial Target) is a structurally sole-sourced, recompete-resistant annuity inside its Unmanned Systems segment ($82.6M revenue in Q1 2026 alone), and every dollar Congress adds to live-fire testing budgets flows through it with minimal competitive risk.
  • Leidos (LDOS) — runs range operations, instrumentation, and test-support services at places like White Sands and Point Mugu where these targets are flown and scored; more live-fire tempo means more range-services task orders regardless of who wins the underlying weapons contract.
  • Mercury Systems (MRCY) — supplies the rugged embedded processing and RF/sensor payloads used in target instrumentation and threat-representative seekers, benefiting from testing volume independent of any single missile program's outcome.
  • AeroVironment (AVAV) — while primarily an offensive/ISR drone maker, its growing target and threat-representative UAS work (via legacy Arcturus and small tactical target lines) gives it a toehold in the same testing-tempo trade, diversifying beyond Switchblade-style headline wins.

Who is exposed:

  • Elbit Systems — competes for target and range-support contracts internationally but has repeatedly lost head-to-head U.S. sole-source recompetes to Kratos's incumbency and cost position, illustrating how hard the moat is to crack.
  • Palantir (PLTR) and Rocket Lab (RKLB) aren't exposed so much as irrelevant here — a reminder that not every defense-tech winner captures this specific, boring-but-durable niche; investors chasing "AI defense" or "space defense" narratives can miss recurring, low-glamour testing revenue entirely.

The play: Watch DOT&E's annual report and DoD's RDT&E "Operational Test and Evaluation" budget line, not just headline missile-sale press releases — rising live-fire test tempo is a direct, low-volatility read-through to Kratos's target backlog, largely insulated from which specific missile program wins.

Source: original report ↗

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