AeroVironment IPO Makes Good in Market

Neal Dikeman submits : Aerovironment, Inc. (AVAV) priced its $114 mm IPO this week, with Goldman Sachs as the lead underwriter. Shares popped up 54%.

From the prospectus, "We design, develop, produce and support a technologically-advanced portfolio of small unmanned aircraft systems that we supply primarily to organizations within the U.S. Department of Defense, and fast charge systems for electric industrial vehicle batteries that we supply to commercial customers."

I have always liked this company. Basically it's an R&D company in power controls and aviation that has built its R&D practice into a provider of next generation solutions of UAVs to the U.S. military.

On their small UAVs:

"Our small UAS are well positioned to support the transformational strategy of the U.S. Department of Defense, or DoD, the purpose of which is to convert the military into a smaller, more agile force that operates through a network of observation, communication and precision targeting technologies, and its efforts to prosecute the global war on terror, which have increased the need for real-time, visual information in new operational environments. . . .

We designed all of our small UAS to be man-portable, launchable by one person and operated through a hand-held control unit. Our small UAS are electrically powered, configured to carry electro-optical or infrared sensors, provide real-time situational awareness and intelligence, fly quietly at speeds reaching 50 miles per hour and travel up to 20 miles from their launch location on a modular, replaceable battery pack. These characteristics make them well suited for reconnaissance, surveillance, target acquisition and battle damage assessment operations. "

On their battery charger products:

"Our PosiCharge products and services are designed to improve productivity and safety for operators of electric industrial vehicles, such as forklifts and airport ground support equipment, by improving battery and fleet management. "

I love these products. My grandfather flew some of the predecessors to these UAVs in WWII. They were flying converted torpedo planes controlling TDR-1 radio controlled TV-guided drones against Japanese installations in the South Pacific. It worked then, and the technology makes it hugely effective now for a much wider range of missions. And one of my former clients used to provide fuel cell technology to some of their earlier protoypes, so I've followed these guys for a while. This area of technology has tremendous military potential.

On the financial side, I'm a little torn.

On $140 mm in 2006 revenue, this kind of backlog is pretty impressive, and it's clear they've been able to drive growth.

"As of October 28, 2006, our funded backlog was $69.5 million and unfunded backlog was $491.5 million. "

And margins have been good for a business of this type.

But I've got a lot of heartache over a defense contractor / aviation supplier trading at a 20+ P/E (defense contracts are three quarters of revenues, almost all of its UAVs, total U.S. government is over 80%). Especially when selling shareholders cashed out 1/3rd of the IPO proceeds. Ouch. The post-IPO pop may have taken it higher than I'd be willing to go.

But maybe for this particular firm, I can get over it.