- AeroVironment has posted strong results, issues a solid outlook.
- Lower military sales is offset by an interest of the usage of unmanned vehicles for commercial activities.
- The company is in a transition phase, therefore the current valuation relies on future growth and might factor in an acquisition premium.
Investors in AeroVironment (AVAV) were pleased with a strong set of fourth quarter results, accompanied by a solid outlook for the fiscal 2015.
Shares of the company have held up well despite falling sales after the wars in Iraq and Afghanistan have ended or scaled down significantly. Yet increased interest in the commercial usage of drones and unmanned vehicles have resulted in enthusiasm by investors in the field.
Fourth Quarter Headlines
AeroVironment reported fourth quarter sales of $73.5 million, which is up by 36% compared to the year before. The performance was very solid, with analysts expecting sales to come in at $69.6 million.
The company posted net earnings of $8.1 million compared to a modest $0.8 million loss the year before. On a diluted basis, earnings came in at $0.35 per share which compares to a four cent loss as reported last year. This came in far ahead of consensus estimates at $0.22 per share.
Looking Into The Results
Growth was driven by product sales which were up by 68.2% to $59.2 million. Contract service sales were down by nearly a quarter to $14.3 million. Revenue growth was driven by higher sales at the Unmanned Aircraft Systems segment, and the Efficient Energy Systems segment to a lesser extent.
AeroVironment managed to achieve great sales leverage with gross margins improving by eight points to 43.9% of sales. Despite the fall in revenues, gross margins of the lucrative contract services improved by two percentage points as well to 29% of sales.
Selling, general and administrative expenses were up by just 18.7%, while R&D expenses were down significantly. As such, income from operations came in at $6.9 million, compared to an operating loss of $6.0 million reported last year.
The company's bottom line was aided by a $2.6 million benefit, while last year's earnings were aided by $6.2 million in one-time income. This one-time benefit was related to the increase in the fair value of the conversion option of the CybAero convertible bond investment.
Looking Into The Fiscal 2015
For the current year, AeroVironment sees revenues between $250 and $270 million. This implies that revenues are seen up by 7-8% at the midpoint of the guidance.
Gross margins are seen between 34.5% and 37.5%. This would result in gross profits of around $94 million, consistent with the results in 2014.
The company warns that increased investments in research & development as well as business developments expenses for the Tactical Missile Systems will pressure operating earnings. Unfortunately, the company did not quantify this impact.
The issued outlook is generally in line with consensus estimates with analysts anticipating revenues of $256.4 million for the upcoming year.
Valuing The Company
AeroVironment ended the quarter with $198 million in cash, equivalents and short term investments. The company has no debt outstanding but has $50 million in additional long term investments, resulting in a very solid financial position.
Trading around $33 per share, AeroEnvironment's equity is valued around $760 million. This values operating assets at around $560 million which values the business at 2.2 times sales and roughly 40 times reported GAAP earnings.
The company does not pay a dividend at the moment.
Strong Historical Growth, And A Good Future Outlook
AeroVironment started to generate revenues from its operations in 2004, posting sales of nearly $48 million that year. From that moment onwards, revenues inched up nicely, increasing every year to highs of $325 million in 2012.
The end of the wars resulted in a steep decline in sales in 2013. This was followed by a modest recovery last year as governments, with the US government in particular, are delaying contracts for unmanned aircraft while the pace of adoption of electrical vehicles has been disappointing.
The company has been profitable over each of those years, although earnings remain far removed from their peak around $30 million in 2012.
AeroVironment is seeing some momentum again, posting relatively solid results over the past quarter. Comforting is also the fact that the backlog rose by $6.5 million over the past quarter, although a total backlog of $65.9 million provides relatively little visibility.
Obviously, the company's strong historical growth path has been driven by the strong intellectual property portfolio, with AeroVironment being the main supplier for unmanned flying devices for the US military. Of course this has been beneficial with developments in this area and the wars in Iraq and Afghanistan. This is the reason why the company has furthermore diverted attention to EV charging, as well as Tactical Missile Systems, in an attempt to diversify its operations.
That being said, the company still relies heavily on its home market and the US military. Yet after the declines in 2013 revenues, operations appear to have stabilized at current levels as investors are comforted by the modest guided annual revenue growth for the coming year.
Unfortunately the increased investment in Tactical Missile Systems, Commercial UAS and Global Observer, might pressure the bottom line. Yet management believes these investments represent the best usage of capital and opportunity to create shareholder value in the long run.
Shares have traded in a $20-$40 range over the past years, currently trading in the middle to higher end of that range. Despite the challenged operations in recent times, the public awareness of drones and unmanned devices has increased curiosity and interest in the field which could make the company an obvious acquisition target.
Large technology firms like Amazon.com (AMZN) which issued statements regarding its desire to use drones to deliver packages, or defense contractors could have an interest. Applications of devices in large agricultural areas could be seen as well. As such it is far too dangerous to bet against the business, but does AeroVironment represent a good investment opportunity?
This all relies on the recognition of future growth and diversification of end markets and industries. I remain cautiously optimistic, given the anticipated growth, yet I will not jump the bandwagon as the current valuation is too high