What happened

Military drone maker AeroVironment (NASDAQ:AVAV) stunned Wall Street with a major earnings beat this morning, sending its shares flying in early trading. As of 12:30 p.m. EDT, the stock is still up a healthy 4.1%, but it's given back a lot of its gains already.

Expected to report fiscal Q1 2020 sales of $86.3 million and per-share profits of $0.35, AeroVironment instead told investors it earned $0.71 per share on sales of $86.9 million, beating on both the top and bottom lines.

Drone firing rockets at a tank

Image source: Getty Images.

So what

Fiscal first-quarter 2020 sales increased 11% versus last year's Q1. Profits either declined by 16% when calculated according to generally accepted accounting principles (GAAP), or grew by 25% (pro forma). Funded backlog of work to be done expanded by 5%, foreshadowing further growth to come.

CEO Wahid Nawabi credited "strong performance globally in our small unmanned aircraft systems product line" for the positive results. He further predicted continued strength as AeroVironment expands its acquired "VAPOR unmanned helicopter solutions" business and said the company is getting better "visibility into the timing of U.S. Army orders for our Switchblade tactical missile systems."

Now what

In dollars and cents, what that means is that for full-year fiscal 2020, AeroVironment is now predicting it will generate sales of between $350 million and $370 million, earning between $1.35 and $1.55 per diluted share. Pro forma profits should be $1.47 to $1.67 per share.

Given that analysts are still looking for full-year sales of less than $357 million and pro forma profits of only $1.51 per share, AeroVironment's forecast is stronger than what many had expected, which explains why the shares went up so much this morning. As for why the stock has since retreated somewhat...I can only hazard a guess at that.

Twist my arm, though, and I'd point out that free cash flow this past quarter was a bare $1.2 million -- down two-thirds from the $3.6 million generated in last year's Q1, and far below the $17.1 million "profit" claimed on AeroVironment's income statement. If investors are worrying that the company's earnings quality is suspect due to cash not backing up more of the reported profit, well, that could explain their waning enthusiasm for the stock.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.