AeroVironment Inc. Earnings: Are Commercial Drones the Wave of the Future?

On Tuesday, AeroVironment (AVAV -0.20%) will release its quarterly report, and shareholders have had their doubts about the sustainability of the drone maker's growth prospects. Even though major aerospace companies Boeing (BA -2.87%) and Lockheed Martin (LMT -0.20%) have been involved in manufacturing drones for a long time, they have so many other sources of revenue that drones won't be the game-changer that they could represent for AeroVironment going forward, especially with the rise in interest in using drones outside the military.

Drones have gotten a lot of attention lately, with both military and commercial applications drawing interest among investors. On the military side, the risk of a flare-up in Iraq as well as ongoing tension in Ukraine reminds investors that the world is still a dangerous place and in need of devices that can help avoid putting people in harm's way. Meanwhile, the desire for ultra-fast delivery as well as private surveillance has launched interest in drones for commercial purposes, and either way, AeroVironment stands to benefit. Moreover, many people forget that AeroVironment also has a stake in the electric vehicle industry, because of its production of charging devices. Let's take an early look at what's been happening with AeroVironment over the past quarter and what we're likely to see in its report.

Source: AeroVironment.

Stats on AeroVironment

Source: Yahoo! Finance.

Will AeroVironment earnings fly higher?
In recent months, investors have stayed firm in their expectations about AeroVironment earnings, expecting the drone company to finish the fiscal year on a positive note and to grow earnings modestly in 2014. The stock has given back a lot of ground, though, falling 18% since mid-March.

AeroVironment's fiscal third-quarter results back in March showed just how much growth potential the company has. Sales of unmanned aircraft systems jumped by more than half, with a new partnership with Lockheed Martin helping to drive the way for the military side of the business. At the same time, the company has also gotten permission from the FAA to operate drones for commercial purposes in certain remote areas, with testing that could help drive growth in the private use of drones for security and surveillance. At the same time, revenue in the electric-vehicle charging division was also up 31%.

Source: AeroVironment.

But many investors are concerned about AeroVironment's future. One worry is that AeroVironment might simply have accelerated the fulfillment of backlogged orders into the 2014 fiscal year, leaving itself with a much flatter growth trajectory in the future. Moreover, contract services income has declined substantially, and although possible military conflicts around the world could lead to a reversal in recent Defense Department budget pressures, AeroVironment still has to deal with the long-term threat of funding cuts on the government side. Already, AeroVironment has seen procurement contracts for its popular Raven UAV cut by more than half in just a two-year span.

The big wildcard is what will happen on the commercial front. AeroVironment has already picked up a major oil-company customer to monitor giant oil fields on the North Slope of Alaska, and similar prospects for North Dakota and other remote areas could drive growth going forward. With a variety of different sizes, AeroVironment has the capacity to fulfill a number of applications for drone use.

In the AeroVironment earnings report, be sure to look at the electric-vehicle side of the business. Even though drones are making all the headlines lately, rising popularity of electric vehicles could also give some diversification to AeroVironment's growth and give it the chance to survive any future budget cuts.

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