Shares of tiny unmanned aerial vehicle maker AeroVironment (NASDAQ:AVAV) soared to new heights in Wednesday trading, gaining 17% after the company announced fiscal Q3 2014 profits that nearly tripled what the company earned in Q3 of last year. Here's a quick rundown of the highlights:

  • Fiscal third-quarter revenues rose 47% year over year to $69.2 million.
  • Profit margins turned positive again, with the operating profit margin reaching 12.4%.
  • Net profit grew 187% to $11.2 million.
  • And on the bottom line, with earnings per diluted share jumping 188% to $0.49.

And that was just the start of the good news. Peering into the final quarter of AeroVironment's fiscal 2014, the company predicted that it will wind up this year with revenues somewhere between $230 million and $250 million, and profits per diluted share of between $0.35 and $0.50. If management is right about that, it will mean that revenues will be essentially flat against fiscal 2013, despite the sequester and defense spending slowdown -- but profits potentially could rise as much as 6%.

Too high, too fast
That said, it isn't all good news at AeroVironment -- and investors who've rushed into its stock today in anticipation of beaucoup profits may discover that they've jumped the gun.

Why? Well, so far this year, the company has only netted $0.25 in profit -- just half of the profits it had earned by this point in time last year. And despite the rosy outlook, funded backlog at the firm -- a defense contractor's best guarantee of future revenues -- declined precipitously from the $133.8 million in backlogged work AeroVironment reported three months ago, to the $95.5 million remaining today.

Also worth noting is that its operating cash flow has declined 32% year over year (through the first nine months of fiscal 2014), even as capital spending has inched up 3%. Result: Free cash flow at the firm currently stands at negative $3.3 million year to date.

What it means to you
What does all this mean to you, the investor? Best case, it means that at a valuation of 74.5 times this year's most optimistic earnings prediction, AeroVironment stock looks very expensive indeed. And worst case, when valued on free cash flow, AeroVironment is a stock selling for a price to free cash flow ratio of infinity -- and so entirely overvalued.

Investing outside of earnings season
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Rich Smith has no position in any stocks mentioned. The Motley Fool recommends AeroVironment. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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