Defense Contractor AeroVironment, Inc. Is Firing on All Cylinders

Why AeroVironment's stock price is simply indefensible, despite having a healthy third quarter.

Mar 5, 2014 at 6:35PM

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
AeroVironment stock benefited from a big pop on the public release of its earnings and guidance -- but not all companies are so fast to make their good news public. Our top technology analyst recently infiltrated one of Wall Street's most exclusive gatherings and left with three incredible investment opportunities, straight from the CEOs. These are profit-building strategies Main Street isn't meant to hear about -- so you must act now before someone shuts us up. Click if you want "industry insider" earnings -- now!

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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers