August was not a kind month to unmanned aerial vehicle maker AeroVironment (NASDAQ:AVAV). News that the company's revenues had declined 23% in fiscal Q1, while losses swelled 66%, sent AeroVironment's shares into a tailspin -- down 19% in a single day.
But fear not, says AeroVironment. There's better news on the way -- and you can thank the U.S. Navy for it.
Eyes in the sky
On Sept. 7, AeroVironment announced the successful completion of a run of tests it conducted with the Naval Undersea Warfare Center. These tests showed how U.S. navy submarines can use AeroVironment Blackwing unmanned aircraft vehicles (UAVs) to communicate with "swarms" of drone submarines (called unmanned underwater vehicles, or UUVs).
"Using an open-architecture communication system," says AV, Navy subs of the future will be able to communicate with and "control ... multiple unmanned vehicles over long distances."
And there's more. At the same time they help sub-drivers to control "a swarm of unmanned undersea vehicles" wirelessly, these same Blackwings serve another purpose: As aerial eyes in the sky, they can beam down "unique intelligence, surveillance and reconnaissance (ISR) capability to submarine commanders."
"Swarms"? Do we even have "swarms"?
Now, if you've been following news in the world of underwater military robots, you know that the Navy does not actually possess literal "swarms" of UUVs for Blackwing to talk with. It has "a handful" at best.
Boeing (NYSE:BA), Lockheed Martin (NYSE:LMT), General Dynamics (NYSE:GD), and Huntington Ingalls (NYSE:HII) all have prototype UUVs in development. And presumably, these are the "multiple UUVs" that Blackwing was communicating with during the Navy's Annual Naval Technology Exercise on Aug. 16, where Blackwing was tested.
In fact, if you squint, you can probably just make out depictions of Boeing's Echo Ranger, General Dynamics' Knifefish, and what might be either Huntington Ingalls' Proteus or Lockheed Martin's troubled "RMMV" drone submarines in AeroVironment's illustration of the Blackwing in action:
What it means for investors
But that's not the point. Even if AeroVironment perhaps stretched the definition of "swarms" a bit, the major thesis of its argument rings true. Earlier this year, AV confirmed U.S. Navy plans in place to deploy its Blackwing across its fleet of attack and guided missile submarines. That fleet currently boasts 70 boats, with more on the way.
As I've stated before, my best guess at the value of deploying Blackwing across this fleet is that it's worth roughly $5 million in revenue to AeroVironment, multiplied by the number of Blackwings deployed per submarine. I also assume that each sub would carry multiple Blackwings -- and now we're learning there may be more revenue streams in play as Blackwing gains new capability in commanding and controlling remotely operated drone subs.
AeroVironment is notorious for holding the price of its wares close to the vest, so it's hard to say at this point precisely how big of a revenue opportunity this is. But for a small defense contractor like AV, it sure does sound like a sizable opportunity.
One more thing: In its press release describing Blackwing, AeroVironment also disclosed that it has partnered with Sparton Corporation (NYSE: SPA) on the project. Smaller in size than General Dynamics or Huntington, and far smaller than Boeing and Lockheed, Sparton boasts a revenue stream 65% greater than AeroVironment's own -- but a market cap less than half AV's size. If you think AeroVironment is worth investing in on the prospect that Blackwing will take off, Sparton Corp may make for an even more promising opportunity.