• Rising global defense budgets and a new wave of military tech investment have helped push some defense-related stocks higher.
• Elbit Systems and Kratos Defense are emerging as two of the sector’s tandout performers.
• Elbit offers exposure to international growth and steady cash flow, while Kratos is a higher-risk, higher-reward innovation play.
• Investors who favor long-term value over short-term momentum might consider L3Harris.

Governments from Washington to Warsaw are heatedly investing in everything from advanced drones to missile defenses, creating what many are calling a new defense supercycle. This year, global defense spending is projected to surpass $2.5 trillion. Well-established contractors and innovative newcomers are benefitting from that acceleration in defense spending, and investors are starting to take notice.

In the US, one of the most ambitious developments is the proposed “Golden Dome,” a $175 billion nationwide missile defense system aimed at shielding the country from ballistic, cruise and hypersonic threats. It could become a cornerstone of American defense policy and a cash cow for contractors.

Among the companies riding this renewed wave of defense investment are Elbit Systems (ESLT) and Kratos Defense & Security Solutions (KTOS)—two of the strongest year-to-date performers in the defense sector. Elbit has gained momentum thanks to its broad portfolio of high-demand technologies and a deep international footprint, particularly in regions ramping up military procurement. Kratos, meanwhile, is on the cutting edge—emerging as a leader in unmanned systems, hypersonic test platforms and space-based defense technology.

Meanwhile, L3Harris Technologies (LHX) presents a different kind of opportunity. It’s been quietly delivering where it counts—solid execution, healthy margins and strong free cash flow. But what makes the company especially attractive now is its valuation: Trading at a discount to peers, it offers a rare opportunity to own a proven defense leader with long-term growth potential at an appealing entry point.

Year-to-date performance in the defense industry

• Elbit Systems (ESLT) +64%
• Kratos Defense (KTOS) +50%
• Mercury Systems (MRCY) +22%
• AeroVironment (AVAV) +21%
• Huntington Ingalls (HII) +21%
• RTX Corp (RTX) +19%
• L3Harris Technologies (LHX) +16%
• General Dynamics (GD) +5%
• Northrop Grumman (NOC) +4%
• Honeywell (HON) +1%
• Lockheed Martin (LMT) -1%

Today, we’ll explore what’s driving returns for Elbit, Kratos and L3Harris in 2025, from contract wins to technological positioning, and how their valuations stack up against their near-term potential. Whether you’re seeking growth, innovation or value, this trio offers a targeted way to help write the defense sector’s next chapter.

Elbit is growing fast, but the valuation looks pricey

Elbit Systems may not have the name recognition of Lockheed Martin (LMT) or Northrop Grumman (NOC) but has quietly become one of the most critical players in the modern defense industry. The company has headquarters in Israel and operates in more than 30 countries. It designs and builds a wide range of cutting-edge military technologies, from precision-guided munitions and battlefield management systems to surveillance drones, cyber services and even experimental directed-energy weapons like the Iron Beam laser defense system.

Over the past year, investors have taken notice. Shares in Elbit have more than doubled in price, fueled by a sharp rise in global defense spending and record-high demand from Israel’s military in the wake of the continuing conflict in Gaza. But with the stock now trading around $430—well above its average analyst price target of $350—the question is no longer whether the business is strong, but whether the upside is already priced in.

To be clear, Elbit’s momentum is impressive. Revenue is growing at a rapid clip, up 22% year over year in the latest quarter, and its backlog just hit an all-time high of $23 billion, giving the company more than three years of revenue visibility. Roughly two-thirds of those orders come from international buyers, many of them in Europe where geopolitical tensions and NATO pressure are driving a new wave of procurement.

Management has responded by expanding production capacity and fast-tracking new initiatives. Notably, Elbit’s land systems division saw a 48% surge in revenue last quarter, largely because of a spike in ammunition sales. Other divisions—from aerospace to cyber—also posted solid double-digit growth, reflecting Elbit’s strength as a diversified defense technology supplier.

Still, the rally has pushed Elbit’s valuation into elevated territory. The stock trades at over 50 times trailing earnings—more than double the sector average—and its price-to-sales and price-to-book ratios are similarly stretched. That premium may be justified by Elbit’s long-term positioning in high-growth defense niches, but it leaves little margin for error if demand slows or macro conditions shift. Case in point: Only a few analysts cover the stock, and sentiment is mixed. Two rate it a hold, and one sees it as overvalued.

For investors weighing a position, the setup is therefore nuanced. Elbit is a world-class company with exposure to powerful long-term trends, including rising defense budgets, global rearmament and battlefield digitization. But after a historic run, the stock may be flying at an altitude where expectations are hard to exceed. Existing holders may choose to stay the course, but new buyers might consider waiting for a pullback or a fresh catalyst before jumping in.

Bottom line: Elbit Systems is a top-tier defense name in a booming sector, but at current levels it’s more a watchlist candidate than a screaming buy unless the company’s growth trajectory starts to accelerate. 

Kratos, a drone innovator, is a bet on the future of warfare

Kratos Defense & Security Solutions isn’t your typical defense contractor. With a market cap just over $6 billion, it’s a fraction of the size of legacy peers like Lockheed Martin or Northrop Grumman. But what Kratos lacks in scale, it makes up for in ambition—carving out a niche at the cutting edge of defense tech, from tactical drones and hypersonic systems to space communications and military-grade microelectronics.

The market has taken notice. Shares of Kratos are up 50% year-to-date and over 70% in the past 12 months — well ahead of the broader sector. And revenue growth has kept pace: Q1 sales rose 9.2% to $303 million, with strong performance in unmanned systems, rocket propulsion and C5ISR technologies. Bookings hit $366 million, pushing total backlog to $1.5 billion, while the company’s consolidated book-to-bill ratio remains a healthy 1.2x.

But the growth story comes with a valuation catch. Kratos trades at a sky-high P/E ratio of 289, compared to a defense sector median closer to 23. Its price-to-sales (P/S) ratio stands at 4.9, vs. the sector median of 1.5, and price-to-book (P/B) is 4.1 vs. a sector median around 2.8. In other words, this is a defense stock priced like a high-growth tech company — expectations are high, and any misstep could be costly.

Part of the valuation premium reflects Kratos’ positioning in key next-gen projects. The company recently became prime integrator on the $1.45 billion MACH-TB 2.0 hypersonic testbed program, it’s ramping up production of its XQ-58A Valkyrie tactical drone and it has growing exposure to missile propulsion and secure satellite systems. CEO Eric DeMarco has also emphasized Kratos’ US-based supply chain, a strategic advantage as tariffs and trade frictions rise.

Still, margins remain underwhelming. Adjusted EBITDA came in at $27 million in Q1, with full-year margin guidance of just 9%. Operating income was about $7 million and free cash flow remains negative — over $51 million burned in Q1 because of capex and inventory build-outs for future contracts. While management projects continued top-line growth (10%–14% annually through 2026), sustained profitability remains a work in progress.

The good news? The company is building for long-term scale. Kratos has a $12.5 billion pipeline, and management is investing heavily in facilities, engines and electronics production capacity. With nine of 12 analysts rating the stock a “buy” or “overweight,” sentiment remains bullish. Still, the average analyst price target sits at $37, and with shares already trading above that level, upside in the near term may be limited unless earnings or margins surprise to the upside.

Bottom line: Kratos is a bold bet on the future of warfare. With deep exposure to tactical drones, hypersonics and space-based defense systems, it stands out as one of the most dynamic and ambitious names in the sector. But it also carries a valuation more in line with high-growth tech than traditional defense contractors, reflecting the market’s lofty expectations. For investors willing to embrace volatility in pursuit of long-term disruption, Kratos offers a compelling, if high-risk, opportunity, especially with analyst sentiment leaning solidly bullish.

L3Harris, a potential Golden Dome beneficiary

L3Harris Technologies has quietly become one of the most important names in modern defense. Created by the 2019 merger of L3 Technologies and Harris Corporation, the company is now a critical contractor to the Pentagon and allied militaries, supplying everything from secure communications gear and missile components to advanced sensors and space systems. With roughly 46,000 employees and operations in over 100 countries, L3Harris occupies a strategic position in the global defense ecosystem at a time when secure, interoperable battlefield technologies are essential to NATO modernization.

After a volatile stretch in 2024, L3Harris shares are up about 16% so far in 2025. And while the company’s latest earnings report included a downward revision to full-year revenue guidance, the market hasn’t turned sour on its near-term prospects. Why? Because beneath the short-term noise, L3Harris is executing where it counts — on cost discipline, international growth and a sharpened focus on core defense priorities.

One of the biggest catalysts this year was a new contract with the Dutch Ministry of Defense, establishing L3Harris as a core partner in NATO’s FOXTROT modernization program. The deal goes beyond financial upside—it firmly positions the company in Europe’s expanding defense communications network, a segment expected to see sustained investment as regional tensions escalate. Management views this as a launchpad for additional international wins, and considering recent momentum that outlook appears well-founded.

On the home front, the company’s LHX NeXt transformation program is also beginning to pay dividends. Originally targeting $1 billion in cost savings by 2026, L3Harris hit $800 million by the end of 2024 and has since raised its goal to $1.2 billion by the end of this year. Those savings are helping to offset margin pressure, with operating margins already improving and free cash flow expected to reach $2.4 billion to $2.5 billion this year. 

From a valuation perspective, L3Harris looks attractively priced given its fundamentals. The stock trades at 28.9x trailing earnings — modestly above the sector median of 23.5x but justified by improving margins and consistent cash flow. Its price-to-sales ratio of 2.2 and price-to-book of 2.4 suggest further room for upside, especially as international growth and cost efficiencies take hold. Analyst sentiment is solidly supportive: 20 of 27 rate the stock a “buy” or “overweight,” with an average price target of $260, roughly 6% above current levels. But with execution on the upswing, that target may prove overly conservative. 

The bottom line is L3Harris offers a compelling investment case in today’s defense sector, blending the reliability of a cash-generating incumbent with the upside of a company sharpening its operations and expanding globally. Shares still trade below intrinsic value, even as momentum builds and margins improve. With its strong positioning in defense communications and missile systems, the company could also emerge as a beneficiary of the proposed Golden Dome. For all of these reasons, we rate the stock a “buy” for investors seeking long-term value. 

Investment takeaways

The global defense sector is in the midst of a structural uptrend, powered by rising geopolitical instability, increased government spending and a growing appetite for advanced technology. Within that context, Elbit Systems and Kratos Defense stand out as two of the sector’s most dynamic names. Elbit offers broad-based exposure to international defense modernization, while Kratos provides high-octane growth tied to emerging platforms like hypersonic weapons and tactical drones. Both have rewarded investors with strong year-to-date gains but now carry valuations that reflect higher expectations.

L3Harris Technologies presents a different kind of opportunity. While not the flashiest name in the group, its consistency in execution, scale across critical defense domains and discounted valuation relative to peers make it particularly attractive for long-term investors seeking quality at a reasonable price. With the integration of Aerojet Rocketdyne now complete, improving margins, and a robust international pipeline, L3Harris appears well-positioned for steady compounding as global defense budgets continue to rise.

Ultimately, the right pick depends on one’s outlook. Elbit may appeal to investors who like international diversification and steady exposure to rising procurement in Europe, Asia and the Middle East. Kratos is better-suited for risk-tolerant investors looking to capture upside from breakthrough technologies and disruptive defense platforms. And for those seeking a more balanced entry point blending cash flow strength, global relevance and operational upside, L3Harris offers a compelling case for long-term growth in an increasingly dynamic sector.

For more, read Trump’s Golden Dome: Brilliant Defense or Trillion-Dollar Fantasy?

Andrew Prochnow, Luckbox analyst-at-large, has traded the global financial markets for more than 15 years, including 10 years as a professional options trader.

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