Flying High With AeroVironment Inc.

Nov. 16, 2022 2:20 AM ETAeroVironment, Inc. (AVAV)
Harold Goldmeier profile picture
Harold Goldmeier
2.83K Followers

Summary

  • Holding shares in the defense industry in these turbulent times is a good investment. AeroVironment can be an opportunity for low risk and profits.
  • The company's good last quarter report appears sparked upgrades to outperform and bullish positions about the stock.
  • The share price is presently on the high side and investors ought to wait for a stumble below $80. The stock is fickle so the wait might not be long.

Regular Australian Army AeroVironment Wasp III UAV launch, flying and recovery demonstration

James Rolevink

In our last analysis of AeroVironment Inc., (NASDAQ:AVAV), we recommended the stock with qualifications. We are moderately bullish about the defense industry as a safe harbor in times of international tensions, and macroeconomic and market uncertainty. AeroVironment is a niche player in the industry; hold shares if you own them and accumulate more in dribs and drabs when the share price stumbles and tumbles to $80 or less.

Fickle Share Price

The shares hit a high of ~$138 in February, '21. The price collapsed to about $55 a share between December '21 and March '22. Over the next three months, the share price popped to $109. Its 52-week high is $114.11. For the rest of this year, the stock meandered between $75 and $96.

Overall, the share price is +117% over five years, +2.6% over the last 12 months, and +42.8% YTD. The share price dropped under $80 four weeks ago. It was a precipitous 6.4% drop in a week. The Beta is a high 0.94 and the short interest is 4.48%. The PE is a high 57.37.

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Quant Rating & Factor Grades (seekingalpha.com/seekingalpha.com/symbol/AVAV/ratings/quant-ratings)

The Company

AeroVironment, Inc designs, manufactures, and globally sells robotic systems and related services through four segments: Unmanned Aircraft Systems (UAS), the Tactical Missile System (or TMS), Medium Unmanned Aircraft Systems (MUAS), and High-Altitude Pseudo-Satellite Systems (HAPS) since 1971.

The company supplies UAS, TMS, unmanned ground vehicles, and related services primarily to the U.S. Department of Defense and allied governments. Unmanned aerial and aircraft systems, airborne platforms, payloads and payload integration, ground control systems, and ground support equipment, and other systems and services related to unmanned aircraft systems generate income. The company sells high-altitude pseudo-satellite UAS systems, small UAS products, spare equipment, alternative payload modules, batteries, chargers, repair services, and customer support. It sells specially designed multiple aircraft, hand-held ground control systems, and spare parts and accessories.

In the interest of relevance, Defense News featured AeroVironment's kamikaze drone, "the Switchblade loitering munition Ukraine has used against Russia in recent months." The tide of war changed when Ukraine began receiving Switchblade kamikaze drones in the spring of 2022. Observers credit drones in part for turning the battle leading to the freeing of the city Kherson in recent days.

Last Quarter Report and Warnings

In September '22, the company reported Q1 '23:

  • First quarter revenue of $108.5M topped $101M in the same quarter Y/Y. It was an organic increase of 7%. Growth in orders for the Tactical Missile Systems and our Small Unmanned Aircraft Systems product lines are primarily responsible.
  • Gross profit for the first quarter was $33.7M compared to $28.7M Y/Y and the gross margin increased to 31% from 28%.
  • A Non-GAAP adjusted net loss of $2.5M or -$0.10 per diluted share as compared to a loss of $4.2M or -$0.17 per diluted share for the first quarter of the last fiscal year surprised the financial community.
  • The company's assets total $896.7M and its total liabilities are $296.5M.
  • AeroVironment's debt at the end of April '22 climbed to $197.5M. Equity was $612M. By the end of July, debt inched down to $185.5M, but so did its equity to $600.2M. The 13.3% debt-to-equity ratio is an improvement; shareholder equity was negative five years ago but is currently positive. That follows AeroVironment's acquisition of 5 companies in 5 years.

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D-E Ratio (ycharts.com/companies/AVAV/debt_equity_ratio)

We forecast the company's Q3 '23 EPS will be about +$0.10, far below the EPS last year. The CEO highlighted this in his talk with shareholders. He says there are "supply chain constraints, inflationary pressures and a tight labor market." The company must exert pressure on:

our most critical suppliers to improve material lead times. We're also continuing to work directly with the office of the U.S. Secretary of Defense at the Pentagon to prioritize our raw material needs. When appropriate we continue to build additional inventory, which will allow us to meet the growing near-term demand for our highly innovative solutions. We're still facing continued headwinds related to the tighter labor markets, especially in key engineering disciplines in support of our growing set of customer funded R&D programs.

The company's operating cash flow of 11.6% to debt is not satisfactory. Cash and equivalents are a slim $105.8M. Management plans to pump up drone production to meet the growing demand for its products. The debt level is about average for similar companies, as is the gross margin. Based on the financial condition of the company and the current spate of orders and backlog valued at over $300M to be filled, we forecast an average price target between $99 and $105 over the next three to six months.

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EPS per NASDAQ (nasdaq.com/market-activity/stocks/avav/earnings)

Among other extrinsic factors affecting AeroVironment's future revenue are rumors circulating the new majority in the House of Representatives wants to cut back aid to Ukraine. Armistice talks may begin between Ukraine and Russia. AeroVironment shares might drop into the mid-$70s in the near term, then bounce back.

In FY '22 and into FY '23, corporate insiders and hedge funds consistently sold shares. Funds decreased their holdings by ~260K shares in the last quarter. The news is not all worrisome. 14 funds held shares at the end of 2021; 10 held shares in AeroVironment through the next two quarters; 17 funds are reportedly holding shares at the current time. Media and news share a positive sentiment because the future financial picture looks brighter. 13.3% of the shares are owned by the public. 1.3% are owned by corporate insiders, 8 of whom own more than half the shares. 85.4% of the shares are owned by institutions. The top two groups holding almost 30% of the shares increased their holdings in the last quarter.

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Earnings Estimates (seekingalpha.com/symbol/AVAV/earnings/estimates)

Takeaway

It is disconcerting that management's salaries and total compensation have been on the upswing while company earnings slip. On the whole, both salaries and compensation are consistent with the industry averages.

Seeking Alpha upgraded its Quant Rating this month to a buy leaning toward a strong buy. The rating alternated between strong sell, sell, and hold for the past two years. All the SA Factor Grades got raised following the last quarterly earnings report. Supply and labor challenges are omnipresent throughout the defense industry. Yet it is flourishing. The SPDR S&P Aerospace & Defense ETF (XAR) climbed from $91.68 in September to over $109 in November. Giving gravitas to our bullishness for AeroVironment is the SA Quant Rating of buy for XAR.

Revenue has steadily increased since 2016. There have been periods of profitability and growth without investors incurring significant risks, but the share price can be fickle and make unsettling moves. The company has a knack for producing quality products military forces want in the new age of emblematic drone technology warfare. Combat drones cost between $2M and $5M each compared to hypersonic missiles which cost +$12M each. Drones are changing the missions and tactics of warfare and AeroVironment is on the front lines of the technology and products securing its place in the defense industry pantheon of companies.

This article was written by

Harold Goldmeier profile picture
2.83K Followers
I write for retail value investors who cannot afford to lose money but sometimes like to take a risk. I speak for free to community and school groups. I was teaching business, social/political activism, and Middle East politics to international university students in Tel Aviv b4 the pandemic hit. I consult with startups and mid-level companies. I co-manage Goldmeier Investments LLC with my son Daniel. I founded the Sappanos Decorating Centers, Chicago, with more than 70 employees and real estate holdings in excess of $15m. I am a former Research and Teaching Fellow at Harvard and Assoc. Prof Tufts Medical School.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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