AeroVironment: Current Price Is Not A Good Entry Point

| About: AeroVironment, Inc. (AVAV)


AeroVironment’s top and bottom lines reported tremendous growth in the fourth quarter of 2013 and beat analyst estimates on earnings per share.

The U.S. Defense Department reduced its spending on the military and this will adversely impact AeroVironment’s revenue.

Civil and commercial firms are expected to support the revenues in the coming years by using unmanned aircraft systems in their operations.

AeroVironment's Fourth Quarter Highlights:

AeroVironment's (NASDAQ:AVAV) reported sales were $73.5 million for the fourth quarter of 2013, reflecting an increase of 36% compared to the year before. The increase in total revenues was the result of a $17.7 million increase in sales in the company's Unmanned Aircraft Systems (UAS) segment. The company also experienced an increase of $1.7 million in its Efficient Energy Systems (EES) segment.

The company reported net earnings of $8.1 million compared to the modest $0.8 million loss it reported in the year before. On a diluted basis, earnings per share was $0.35 per share compared to a four cent loss reported last year. This came in far ahead of consensus estimates of $0.22 per share.

Analysis of AeroVironment's Expectations For 2015:

For the current year, AeroVironment's expectations regarding its revenues are between $250 and $270 million, reflecting an increase of 7 to 8 percent. On the other hand, analysts on Yahoo Finance are also expecting revenues to be around $258 million by the end of this year.

Gross margins are between 34.5% and 37.5%. This would result in gross profits of around $94 million, consistent with the results in 2014. In its outlook for 2015, the company warns that increased investments in research and development of Tactical Missile Systems will put pressure on operating earnings. Unfortunately, the company did not quantify this impact, but analysts do incorporate this information and expect the company's earnings to suffer a decline of 89%.

Source: NASDAQ

The Global Observer identified the Tactical Missile Systems as one of the company's largest growth areas. However, the war in Afghanistan and Iraq ended back in 2011, so the demand for weapons also reduced. Furthermore, the U.S. Department of Defense announced it would reduce its military spending by $1.2 trillion over the next 10 years. I believe that AeroVironment's sales from its arsenal will be reduced in the coming years, as 45% of total revenue consists of sales to the U.S. military. Also, if the government intends to reduce its spending on weapons from $851 billion to $529 billion in 4 years, then it is quite reasonable to expect that this decision will adversely impact the company.

Performance of AeroVironment's Business Segments:

AeroVironment designs, develops, produces, supports, and operates unmanned aircraft systems (UAS) and efficient energy systems in the United States and internationally.

Efficient Energy System

According to financial statements, "The efficient energy system segment focuses primarily on the design, development, production, and marketing of innovative electric energy systems that address the growing demand for electric transportation solutions." Electric technology, consisting of electric cars and charging stations, has been a growing market over the past few years. AeroVironment's revenue for the EES segment has declined by 6.5% over the year due to the fact that the growth is not coming from companies that AeroVironment previously partnered with like Ford (NYSE:F) and Nissan. That's the main reason behind the decline in the EES segment of the company despite the fact that the demand for electric cars is growing.

Unmanned aircraft systems (UAS)

According to financial statements, "The UAS segment focuses primarily on the design, development, production, support and operation of innovative UAS and tactical missile systems that provide situational awareness, multi-band communications, force protection and other mission effects to increase the security and effectiveness of the operations of the Company's customers." The company's UAS segment contributed 83% to the total revenue in the quarter ended April 214; the segment also witnessed growth of 8.6% over the year. Considering the company's latest press releases regarding BP Exploration (Alaska) Inc. and Lockheed Martin Corporation's joint ventures with AeroVironment in the unmanned aircraft systems markets, I believe that in the future AeroVironment's revenue from the UAS segment will add some extra profitability.

According to press release, "AeroVironment announced that BP Exploration (Alaska) Inc., selected the company to provide mapping, Geographic Information System (GIS) and other commercial information services at its Prudhoe Bay oil field, the largest oil field in North America, for a five-year period."

According to press release, "AeroVironment, a leader in unmanned aircraft system solutions, and the Lockheed Martin Corporation (NYSE:LMT), one of the world's largest aerospace companies and a leading systems integrator, announced an agreement today to jointly pursue opportunities in unmanned aircraft system (UAS) development."

Although the U.S. Department of Defense announced the reduction in the defense budget, the alliance with Lockheed Martin will be beneficial for the company as the demand from civil and commercial entities is expected to boom in the coming years. The agricultural industry will be the biggest commercial user of the company's UAS. Furthermore, Amazon (NASDAQ:AMZN) also expressed its desire to use drones to deliver packages and officially asked the Federal Aviation Administration for permission.

Final Words:

AeroVironment is suffering from a decline in revenues because of heavy reliance on the U.S. military and U.S. Department of Defense. However, after the revenue declines in 2013, operations appear to have smoothed for future years considering the expected annual revenue growth in the coming year.

Furthermore, the increased investment in research and development of the tactical missile systems might impact the bottom line, but I believe that this investment represents the best usage of capital and is an opportunity to create shareholder value in the long run.

The company's shares are currently trading at $32.14 per share. Over the past 12 months, the shares were trading between $24 to $41 and so the current price is in the middle of that range.

Civil and commercial firms expressed their desire to use drones in their operations like Amazon and the agricultural industry. But right now it is not expected that regulatory authorities will allow all the civil and commercial firms to use this technology except for the agricultural industry.

I am quite optimistic given the expected growth opportunities, but will not recommend jumping into this stock at this price. However, investors who already have this stock should hold this stock for a while.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.