I have to admit it: As an AeroVironment (Nasdaq: AVAV ) shareholder, I was pleasantly surprised at how my fellow investors reacted to the stock's fiscal 2008 earnings report yesterday.
It's not every day that a company walks away unscathed after reporting an 18% decline in annual earnings per share and warning that it's about to see one of its main revenue drivers decline by one-third while its profits get taxed at a higher rate. Ordinarily, you'd expect to see the stock punished -- badly. Ordinarily, you'd expect anything but the stock going up 6% on the news.
Then again, Tuesday's news was anything but ordinary. I'll lay out the details for you below, but if you don't find it all in the press release, never fear -- the good folks over at SeekingAlpha.com have once again done us the great kindness of transcribing the post-earnings conference call from AeroVironment (AV). What follows is a digest of the most important news from both the release and the call.
Let's start with the basics. AV has said for as long as anyone's been listening that it wants to grow its revenue by 20% to 25% per year, and earn operating margins in the low teens on that revenue. CEO Timothy Conver tells us that "doing what we say continues to be a core value of the company in all of our relationships," and indeed, management was as good as its word Tuesday, reporting:
- Annual sales of $215.7 million, up 24% against fiscal 2007.
- Gross margins of 36% on these sales.
- And 13% operating margins -- squarely in the middle of management's promised range of 12% to 14%.
So at last report, AV continues to thump larger rivals like L-3 (NYSE: LLL ) , Lockheed Martin (NYSE: LMT ) , Northrop Grumman (NYSE: NOC ) , and Boeing (NYSE: BA ) , in the margins race. At 13% operating margins, it's now neck-and-neck with Honeywell (NYSE: HON ) and Textron (NYSE: TXT ) when it comes to operating profitability. But enough about last year. What about the year to come? Bad news first:
The tax man wenteth, but now he cometh again
Taxes were down from fiscal 2007 levels in fiscal 2008. This year, they'll be heading back up to about 37%.
UAV sales will get worse before they get better
AV's military customers want some tweaks made to its Raven and Wasp UAVs. Getting the job done will require AV to cut back its deliveries of these birds by about one-third of the Q4 level. (However, the pace of deliveries should pick back up later in the year.)
Lending confidence to that "later in the year" part, CFO Stephen Wright confided: "The Army [plans to buy] 1,900 [Raven] systems through Q4, we are about 43% delivered against that Army acquisition objective." To me, that sounds like AV has another 1,083 systems yet to deliver in fiscal 2009 and beyond.
End result: Overall, management is once again targeting 20% to 25% sales growth in fiscal 2009, and once again expects to pull down 12% to 14% margins on its revenue. Call it $264.2 million in revenue this year, and maybe $34.4 million in operating profit at the midpoint of these estimates.
... and better
Looking still farther down the runway, AV's sales should continue growing strongly, perhaps long after 2009 (fiscal and otherwise) is done. Management confirmed that its backlog now stands at $82 million, which is 35% higher than it stood one year ago. Thus, new orders are arriving faster than AV has been filling old orders -- which suggests to me that sales will accelerate going forward. Management also confirmed that when it's talking "backlog," it's talking firm orders only. IDIQ (indefinite delivery, indefinite quantity) backlog, which is unfunded, currently stands at a whopping $384 million.
Like it or not, political support and the larger environment for defense spending are key to the success of any military contractor. So let's close with a few words from the CEO on that score:
- "What will happen as a result of the drawdown of U.S. troops in Iraq as it relates to our small UAS business? Here is my view. First it’s clear that UAS are here to stay. Newsweek's recent headline: 'The hundreds of drones cruising over Iraq and Afghanistan have changed war forever,' is a good summary."
- "... [C]ongressional support for affordable force protection is wide spread and bipartisan. And we believe that any administration will provide similar support. If a drawdown of U.S. forces from Iraq does take place, we believe it will take some time to complete and that it will require tools such as our systems that protect our troops during the process ..."
Investors this morning may be reconsidering, and reworrying over, the near-term risks posed to AV’s Q1 profits by higher taxes and slowed UAV deliveries. But to my mind, it was the long-term-focused buyers who got things right yesterday.
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