AeroVironment Crashes, Shares Burn

Spooked by the twin bad news items of a disappointing earnings forecast and an analytical downgrade, investors are dumping shares of AeroVironment (Nasdaq: AVAV  ) today. I happen to own shares myself and ... I couldn't be happier.

I'll tell you why in a moment, but first -- the bad news. Yesterday evening, AeroVironment (AV to its friends) reported its fiscal year-end 2010 results. "Record revenue and profitability" in the fiscal fourth quarter were the headline, but the underlying news was significantly less bullish. In a tough year for defense, this maker of unmanned aerial vehicles (and un-gasolined charging stations for electric cars) grew its revenues less than 1%, to $250 million. Operating margins came in at an underwhelming 12%, while net profits plunged more than 15% to just $0.94 per diluted share.

Worse still, in forecasting how things might play out next year, AV hewed to its traditional conservatism and predicted revenue growth of only 10% to 15% (short of consensus expectations for 16% growth), alongside operating margins that could, once again, be as low as 12%.

Aside from that, Mrs. Lincoln, how was the play?
Pretty lousy news, you must admit. While everybody else in the UAV-world -- from Global Hawk-er Northrop Grumman (NYSE: NOC  ) to Black Hawk roboticist United Technologies (NYSE: UTX  ) to Phantom up-and-comer Boeing (NYSE: BA  ) -- is busy reporting new products, new contracts, and generally taking the world by storm, AV seems stuck in a rut.

That said, there is reason to hope things will soon improve. Consider: Earnings dropped 18% last year, but free cash flow turned back up at year-end, holding cash production to just a 5% drop ($25.2 million). Naturally, we don't want to see any decline at all, and so it's disheartening to see that while AV managed to cut its accounts receivable by 10% last year, its inventories spiked 80% higher.

And yet, take a closer look at those inventories and tell me -- what do you see? Finished goods up 100%, yes, and I'd certainly rather see those goods showing up as "goods sold" rather than as "inventory." But work-in-progress is up 170%, which suggests to me that AV is gearing up to complete and deliver quite a lot of finished goods in the near future. Call me an optimist, but as surprised as Wall Street purports to be about AV's guidance, I wouldn't put it past the company to surprise us to the upside with its actual results this year.

Fool contributor Rich Smith owns shares of AeroVironment, which is also a Motley Fool Rule Breakers recommendation. The Motley Fool has a disclosure policy.


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  • Report this Comment On June 25, 2010, at 6:36 PM, shivy1 wrote:

    The reasons you gave are not really reasons at all. If anything they sway me away from the stock. Looking at it, the company looks pretty bad. I know you are holding shares so you have optimism, but I wouldn't reccomend it to readers at all. I dont have any reason to believe it will grow atleast not in the next 10 years.

  • Report this Comment On June 25, 2010, at 7:54 PM, CatFoodMoney wrote:

    Everybody is going to have a flying robot in 10 years.

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