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Did AeroVironment Really Just Fall Back to Earth?

By Dan Caplinger – Mar 6, 2018 at 6:30PM

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Perceptions of the drone maker's latest results could be misleading.

The drone industry has promise for a wide range of possible applications, and investors have long looked for pioneering drone maker AeroVironment (AVAV -4.06%) to play a more pivotal role in advancing drone technology. So far, that hasn't panned out in terms of producing huge profits, but the company has made some progress in looking for ways to take advantage of the opportunities in the space.

Coming into Tuesday's fiscal third-quarter financial report, shareholders wanted to see the company maintain some of its positive momentum from its previous earnings report. The headline numbers caused some investors to lose confidence, but one-time impacts masked some of the continued gains it's made. Let's take a closer look at AeroVironment and what its latest numbers say about its future.

Unmanned aerial vehicle using sensors to navigate through varied terrain.

Image source: AeroVironment.

AeroVironment sees sales keep climbing

AeroVironment's fiscal third-quarter numbers were mixed in some people's eyes. Revenue of $63.9 million was 20% higher than in the year-ago periods, surpassing expectations among those following the stock for a 17% growth rate. A GAAP net loss of $828,000 translated to per-share red ink of $0.04, disappointing those who had wanted to see another modest profit.

Yet AeroVironment's setback came largely from tax reform impacts. The company said that the Tax Cuts and Jobs Act of 2017 reduced the value of the deferred tax credits that it held on its books, resulting in a $0.13-per-share hit to its bottom line. Accordingly, adjusted earnings of $0.09 per share would have topped the consensus forecast for $0.05 per share.

As we've seen in recent quarters, the unmanned aircraft systems segment was the driver of growth for AeroVironment. Segment sales were higher by 28%, with gross profit seeing a more modest rise of 6%. Unfortunately, the efficient energy systems segment wasn't able to keep pace, posting a 7% drop in its top line despite improving its gross profit by 10%.

AeroVironment's other fundamentals were sound. The company managed to continue containing its expenses, helping to bolster its bottom line. Overhead costs were up a reasonable 6%, and research and development costs were cut by almost $675,000 to minimize its operating loss. Backlog remained solid at $123.5 million, higher by almost 60% from where AeroVironment started the fiscal year.

CEO Wahid Nawabi discussed the projects that have helped the company succeed:

In the third quarter we entered into a $100 million joint venture with SoftBank Corp. to launch our global, stratospheric broadband communication business. Our joint venture has signed a $65 million contract with AeroVironment to demonstrate the next generation solar High-Altitude Pseudo-Satellite, or HAPS. Our core unmanned aircraft systems business secured its largest-ever international contract, valued at $44.5 million, reflecting continued strong international demand for our market-leading small UAS family of systems.

What's ahead for AeroVironment?

AeroVironment remains enthusiastic about the future. As Nawabi noted, the company's substantial backlog and good execution of its overall plan for fiscal 2018 give him more confidence that the business will reach the targets that it has set for itself.

Once again, though, some investors might have been disappointed with the company's decision not to make any adjustments to its full-year fiscal 2018 guidance. AeroVironment reaffirmed its expectations for sales to be between $280 million and $300 million for the year. Earnings guidance also remained unchanged in a range of $0.45 to $0.65 per share. Some had hoped that stronger top-line figures might prompt upgraded expectations.

Perhaps because of that, shareholders seemed a bit let down by the results, and the stock lost about 8% in after-hours trading following the announcement. Nevertheless, if AeroVironment can keep using projects like the ones it mentioned in its release to build up its businesses, then any negative reaction from investors could prove short-lived.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool recommends AeroVironment. The Motley Fool has a disclosure policy.

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