Time to Bear Down on AeroVironment?

AeroVironment's (NASDAQ: AVAV  ) stock is again on the rise following the release of their fourth-quarter earnings report. The manufacturer of unmanned aerial systems, or UAS, and electric-vehicle charging systems beat Wall Street's performance expectations in the fourth quarter with a reported $73.5 million in revenue -- $4 million more than what analysts' projected. This is the third quarter that AeroVironment has surpassed analysts' expectations.

The 36% increase in revenue from the previous year's fourth quarter has created some starry-eyed optimism among investors. The share price rose to $35.05 on July 9, the day after the fourth-quarter announcement -- a 14% increase from the previous day. AeroVironment is an exciting company to invest in for those seeking out opportunities to become a part of the UAS revolution. Investors seeking a profit from AeroVironment stock, however, should factor in some information from the company's 2014 10-K before running with the AeroVironment bulls.

Glass half full
AeroVironment's fourth-quarter gains were largely due to increased sales in their UAS product line, which jumped to $60 million in Q4 from $42.4 million the previous year. The jump in sales in AeroVironment's UAS division is due to the company's limited success in crossing into the commercial UAS market and the increased demand for its tactical missile systems.

In June, AeroVironment was the first company to be granted Federal Aviation Administration approval to fly its drones over land for commercial purposes. The PUMA AE, AeroVironment's small UAS that was a favorite for combat operations, is now being used by BP Exploration in Alaska to survey its Prudhoe Bay oil field. AeroVironment's tactical missile system, Switchblade, a small precision UAS with lethal capabilities, received $36.7 million in new orders in 2013 from the U.S. Army -- the largest order in the product's history.

PUMA AE and Switchblade were the major stimuli for AeroVironment's UAS sales in 2014. AeroVironment's arrangement with Lockheed Martin (NYSE: LMT  ) in February has, also, given new life to its high altitude, long endurance drone, Global Observer, which AeroVironment expects to be a major growth area for the company over the next five years.

Glass half empty
AeroVironment's reported double-digit revenue increase in Q4 2014 isn't nearly as exciting when examining AeroVironment's 2014 10-K. The 36% increase from Q4 2013 is reduced to 5% when comparing data from AeroVironment's annual reports. AeroVironment generated $251.7 million in revenue in 2014 -- an increase of $11.5 million from the previous year. However, AeroVironment's revenue in 2014 is still just a shadow of its 2012 earnings of $325 million.

The increase in AeroVironment's EPS is, also, not as sensational in the annual report as it is when viewed in the fourth quarter. AeroVironment's fourth quarter EPS of $0.36 per share put analysts' projection of $0.23 per share to shame. However, EPS for 2014 was $0.61 -- an increase from 2013's EPS of $0.47 per share but still nowhere near 2012's EPS of $1.40. Despite the strength of AeroVironment's performance in 2012, the monthly average stock share price was $24.24 -- cheap in comparison to its current 200 day moving average of $33.25.

AeroVironment was transparent about large fluctuations in their quarterly operating results and common stock share prices. Both were listed as risk factors for investors in their 2014 10-K. Unfortunately for investors, those disclaimers weren't included in their fourth-quarter announcement.

AeroVironment's outlook for 2015 is also a cause for some healthy pessimism. Commercial UAS and tactical missile systems spiked AeroVironment's 2014 sales revenue. The Global Observer was identified as one of the company's largest growth areas. These three areas, however, will be a drain on the company's operating profits in 2015 due to R&D activity and business development investments.

It's how you look at it
It is unlikely that AeroVironment will be able to sustain its current stock share price in the immediate future. The commercial UAS market will need to open before AeroVironment can truly unlock its value and become a profitable investment. AeroVironment, however, has defied analysts' expectations for three quarters in a row. It, along with the UAV industry, is full of surprises and investors who like roller coasters may find that AeroVironment stock is worth it just for the ride.

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  • Report this Comment On July 29, 2014, at 11:39 AM, ScottAtlanta wrote:

    Buy the company right?

    I bought b/c of company long history of cutting edge innovation and ability to come out on top.

    Also..it's 750M market cap means it's got a lot of room to grow in a world destined for drones and electric vehicles, etc. and missiles, unfortunately.

    This is easily a several billion market cap co. in a few years which means...3 x, 4 x + ...today's investment.

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