AeroVironment: Good Kitty

After soaring 10% over the course of the past week, shares of unmanned aerial vehicle (UAV) maker AeroVironment (Nasdaq: AVAV  ) have finally settled on a cruising altitude north of $30 -- near an all-time high. What's got investors so up on AV? That's what we're here to find out.

A year's pay, in one day
Basically, it all boils down to one deal. Last week, AV landed a contract to produce its new Puma AE small UAV for the U.S. Special Operations Command (USSOCOM). The indefinite delivery, indefinite quantity contract kicks off with an initial delivery of $6 million worth of Puma AE's. If the initial one-year contract gets maxed out, and if the four one-year follow-on options are exercised in full, however, the contract could go as high as $200 million in value.

So basically, AV could get its entire last year's revenue out of this single contract. Not bad for a day's work, and good enough for a 10% bump in stock price.

Back up a sec. Puma who?
OK, a bit of background. You already know the Puma. Weighing in at 12 pounds and with a wingspan of 8.5 feet, it's AV's biggest "small" AV -- nearly twice as big as the Raven, and nearly four times as large as the Wasp. Yet as AV assures me, the Puma is still small enough that it can be launched by hand. (Actually, I'm thinking two hands is more likely.)

To date, the Raven and Wasp have been getting all the glory. The Puma has showed up only rarely -- for example, in a March conference call in which its Aqua Puma variant was said to be unsalable, but could give rise to a more successful product. That product, it would appear, is the Puma AE.

While AV keeps mum on the new UAV's exact specs, what we do know is that it is of similar size and weight, but improves on the original Puma by being able to land on water as well as land, and carrying a more advanced "payload" -- a stabilized camera that can watch a single point and remain fixed on it while in motion. Thanks largely to these features, AV has notched its fourth consecutive competitive contract win in the UAV space.

The competition
Management remains coy as to just whom it's competing with when winning these contracts. But that doesn't mean we can't do some educated guesswork -- and as investors, we really do need to keep an eye on the competition. A bit of clicking around Wikipedia turns up nearly a dozen AV rivals of various shapes and sizes, including such disconcertingly vaunted names as "MIT" and "CalTech." Among publicly traded companies, however, the most formidable competition appears to come from:

  • Lockheed Martin (NYSE: LMT  ) , whose seven-pound Nerf-like UAV, the Desert Hawk, has enjoyed some success.
  • Honeywell (NYSE: HON  ) , with its even more successful 18-pound "Micro Air Vehicle."
  • Raytheon (NYSE: RTN  ) , which is working on a small "parasite" UAV called "SilentEyes," to be deployed from larger UAVs such as the Predator.

The price
If AV has an Achilles' heel for investors, it has to be the stock price. For whatever reason, most large defense contractors tend to gravitate to a price-to-sales ratio of 1.0. Name any defense shop you like -- Boeing (NYSE: BA  ) , Lockheed, L-3 (NYSE: LLL  ) , Raytheon, Textron, or General Dynamics (NYSE: GD  ) -- and you'll find that almost of them sell within a range of 0.7 to 1.3 times sales. Meanwhile, at nearly three times sales after the recent run-up, AV stock comes much dearer.

Foolish takeaway
Now, in AV's defense, management believes that it can grow sales and earnings at 20% to 25% per year for the foreseeable future, and CEO Timothy Conver assures us that "doing what we say continues to be a core value of the company." That growth rate beats out most of AV's competition by a factor of two, which should mitigate at least some of the price risk in AV's stock -- if AV can keep the growth going.

Contract wins like the Puma AE's success last week suggest that it can.

Further defensive Foolishness:

Fool contributor Rich Smith owns shares of both AeroVironment and Boeing. The Motley Fool has an all-terrain disclosure policy.


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 09, 2008, at 8:51 PM, nikbruno wrote:

    You didn't even touch on the alternative energy business in architectural wind nor did you mention how AV fits into a totally niche segment of the market by focusing exclusively on small UAV's. What about the phase II Darpa contracts ? The potential for using these small UAV's for local security and policing ? You really should bring all the facts to the table

  • Report this Comment On July 11, 2008, at 11:50 AM, GordonJohnsock wrote:

    Some problems with nikbruno's comments.

    1. The segment is Mini-UAS; "Small UAVs" (SUAS) are 150lbs to 500 lbs. AV also has larger platforms (Global Observer) that are outside of the "niche" market you mention. If AV is "niche" in anything, it is that they do not use combustion of liquid fuel powerplants.

    2. The potential for local security and policing in the United States is a long way off. Currently, the FAA will not allow flights in the NAS (National Airspace) in areas where there is any population. Getting COAs (Certificates of Airworthiness) are a long procedure, and do not give you a green light to fly anywhere. Even flying in a remote area requires a lot of time and paperwork. Domestic UAS for local policing is years away at best. Investors should not be fooled by any short-term potential in this area.

    3. If you want the full scoop on AV, architectural wind is a minor portion of the business. A larger portion is their Positron chargers that major manufacturing companies use for forklifts and other electrically charged equipment.

    What will be interesting is that AV recently went public. These innovations and products were developed when the company was privately owned and could take feduciary risks in research and development. With shareholders in the mix, the bottom line will come into question. Hopefully these contracts will allow them to work around that issue. The big question is how much money from each sale goes into their IRAD?

  • Report this Comment On July 13, 2008, at 10:41 PM, nikbruno wrote:

    Way to hyper-analyze my brief comments that simply highlight how the author left out all the facts. Nice job Gordon !!!

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