By now you've heard the news: AeroVironment (Nasdaq: AVAV ) broke the revenue sound barrier in the second quarter.
Revenue leapt 22% to a record $65.8 million. Operating margins raced ahead of management's long-term goal of 12% to 14%, weighing in at a beefy 19%. And earnings? Those jumped 71% in comparison to last year's second quarter, hitting $0.41 per share. With analysts looking for a mere $0.27 quarter, AV earned half again as much as it was supposed to.
Yawn.
Boring
Longtime AV investors know that's par for the course. AV's done that in every quarter on record.
OK. So you want something new. But for that, you've got to go past the earnings report, and learn what management said on the post-earnings conference call. Now, I know conference calls aren't for everyone. They're long, stuffed full of fluff, with analysts wasting precious minutes on sycophantic choruses of "Great quarter, guys" and so on.
Fortunately, in the 21st century, you no longer need to actually listen to these calls -- that's what I'm here for. Here are the highlights:
Like the 19%? Don't get used to it
Probably the most important point from AV's conference call that didn't make it into the earnings release was this cautionary statement from management: Just because AV earned great margins in the first half of fiscal 2009 doesn't mean we'll see the same in the second half.
Management said the above-trend operating margin in the first half was "primarily due to higher gross margin and lower selling, general, and administrative expense." Expect this to reverse in future quarters, however, as the company "plan[s] to increase investments in IR&D, SG&A and infrastructure throughout the second half. These investments should bring our ... operating margin in line with our original targets for the year."
In other words: 12% to 14%.
Expect less, and sooner rather than later
Mind you, that's still at the upper range for profit margins in the defense-contracting sphere. AV's larger rivals struggle to reach even this lower band of profitability. Boeing (NYSE: BA ) and Northrop Grumman (NYSE: NOC ) , for example, are mired in single-digits. Raytheon (NYSE: RTN ) and Lockheed Martin (NYSE: LMT ) fall just short in the 11% range. Really, the closest you'll come to finding AV-like margins in the large contractor sphere are United Tech (NYSE: UTX ) and Textron -- and even Textron is flagging fast.
And speaking of flagging fast, AV could be in for some rough comps in the current quarter. As CEO Tim Conver pointed out in last week's call, the company typically closes for a week or longer for the holidays, "reducing production during our third quarter. The result in the past two years has been that our third quarters have been flat or down from our second quarters." In management's view, this will exacerbate the effect of higher SG&A spending and internal R&D expense in this current quarter, helping to deflate operating margins in Q3 (although Q4 may bounce back).
Good news and bad news
Of course, none of the above really qualifies as "bad news." It's just management reminding us not to get excited, and understand that when they underpromise and overdeliver -- great! -- but don't take it for granted. 12% to 14% operating margins is what they say, and it's what they mean.
But there is at least the potential for actual bad news, too. Much has been said (and written) about how an Obama Administration will affect your portfolio. In AV's case, the hopes are that:
- Obama means what he says about increasing the size of the armed forces, and equipping our military with more Unmanned Aerial Vehicles.
- The new administration's emphasis on green energy means good things for AV's "EES" division, which builds both rooftop turbines to capture wind energy on buildings, and electrical systems that could facilitate electric cars.
On the one hand, AV's role in helping General Motors (NYSE: GM ) build the EV-1 seems to position it to benefit from the new administration's plans. On the other, there's a downside, and it could be significant -- here's a quote from the call:
It is in the EES segment that our exposure to current issues relating to the credit market and the economy is likely to be highest. EES constituted 14% of our Q2 revenue. Of that 14%, the majority is ... to industrial customers and a significant subset is sold to the automotive industry worldwide which is facing significant challenges.
Our electric vehicle test systems are used primarily by developers of electric vehicles and advanced energy storage systems ... Capital spending retrenchment in general and continued pressure on the automotive industry in particular could adversely affect our EES business in the future.
In other words, AV has good news and bad news for us here. The bad news is that the target market for EES is struggling. And the good news? If as much as 14% of revenues are at risk, then 14% of revenues are already coming from the industry. Looks to me like AV's getting a pretty firm foothold here.
Now we just need the automotive industry to survive, so that AV can capitalize on it.
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