Investor Opportunities in the Strange and Speculative World of Unmanned Drones

A look at the little guys in this disruptive industry.

Jul 3, 2014 at 12:50PM

Unmanned Aerial Systems, or UAS, have revolutionized not only the conduct of war but also the aerospace and defense industries themselves. The project that Israeli engineer Abraham Karem began in the garage of his Los Angeles home in 1980 has become the most dynamic growth sector of the aerospace industry, with expenditures in the global market projected to reach $89 billion in 10 years. Despite the UAS industry's spectacular growth, the U.S. market remains largely shielded from the scrutiny of public investors, due to the prominence of privately held companies in the industry and the diversification of the publicly held corporations that have a hand in UAS. Investors, however, do have options.

The little guys
Like all disruptive technologies, the UAS industry is crowded with start-ups on the pathway to becoming well-established corporations or becoming the acquisitions of the aerospace titans. The number of start-ups involved with UAS technology has ballooned due to the expectations for the commercial drone market -- it has even spawned the Unmanned Vehicle University, which provides a how-to guide for launching a drone start-up for a nominal fee. Textron (NYSE:TXT) and AeroVironment (NASDAQ:AVAV), however, are currently the only smaller-scale companies engaged in the UAS market with public offerings. The impact of UAS's on their sales and revenue is easy to decipher, enabling investors to fully understand their share in the revolutionary industry.

Textron
Textron, like its aerospace and defense industry colleagues, is a diversified corporation with business segments that stretch from aircraft, defense and industrials to finance. Of its five distinct operating units, Textron Systems encompasses the company's contributions to the UAV industry. Textron's subsidiary AAI, which it acquired in 2007, is producer of the popular RQ-7 Shadow, one of the few UAVs that received an increase in procurement contracts in 2015. Its ground control stations and UAS training and support are also a critical component of the command, control and communications operations that transform unmanned aerial vehicles into unmanned aerial systems.

Textron Systems, however, has a minimal role in the overall revenue of the corporation. Of the $12 billion in revenue earned in 2013, only $1.6 billion came from Textron Systems. UAS was responsible for the majority of the revenue reported by Textron Systems -- $666 million -- but is only one of four categories in the division that also includes marine and land systems and weapons and sensors. The small role of Textron's UAS activity on the overall corporation is, in part, due to its specialized products and services. However, the small-scale of Textron Systems' UAS division and their consolidation into a distinct operating unit of the corporation provides investors with a clear vision of their stake in the UAS industry.

AeroVironment
AeroVironment, developer of UAS products and electric-vehicle charging systems, went public in 2007 with an IPO price of $17 and 6,700,000 shares offered. The CA start-up founded in 1971 has grown into one of the biggest little companies in the UAS industry. It has cornered the market in easily transportable and deployable compact drones such as the Raven, Wasp AE, and Puma. It has developed a new generation of drones, such as the Nano Hummingbird, capable of supporting military operations in an urban environment and has UAS products with commercial applications ready to hit the market as soon as commercial drone use is given the green light from the Federal Aviation Administration.

AeroVironment is the only publicly traded company that derives the majority of its sales and revenue from the UAS market. Of the $240 million the company earned in revenue in 2013, $194 million was a direct result of their UAS activity. The dramatic decrease in revenue from 2012 -- approximately $85 million -- was also a direct result of the military's slowing demand for UAS. Service revenue was lost due to a diminishing need for Raven retrofits and product sales were down, especially for their PUMA model. Due to AeroVironment's specialized focus on drones, its stock share prices and EPS mirror the ups and downs of the UAS industry. AeroVironment's financial reports, also, provide a window into the world of the drones and a blueprint for investors about where that world is heading.

Investor options
UAS has been a game changer. The revolutionary technology that changed the face of war is seeping into the commercial world and promises to have an equal impact on society. In an industry dominated by private corporations, investors in search of opportunities to become a part of the UAS industry have limited options. Textron and AeroVironment are the smallest publicly traded companies engaged in the production of UAS. Textron, however, is a diversified company with a limited UAS product lines. Investors who are interested in UAS because they want a share in the technology that is changing history may find AeroVironment to be the most satisfying investment. Investors will see their portfolio rise and fall along with the tumults of the UAS industry and they will feel as though they are a genuine part of it.

Warren Buffett's biggest fear is about to come true
Warren Buffett just called this emerging technology a "real threat" to his biggest cash-cow. While Buffett shakes in his billionaire-boots, only a few investors are embracing this new market which experts say will be worth over $2 trillion. It won't be long before everyone on Wall Street wises up, that's why The Motley Fool is releasing this timely investor alert. Click here to learn more about what's keeping Buffett up at night and the one public company we're calling the "brains behind" the technology.

Abigail W. Adams has no position in any stocks mentioned. The Motley Fool recommends AeroVironment. The Motley Fool owns shares of AeroVironment and Textron. 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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