What happened
Drones made by AeroVironment (AVAV 2.26%) are reportedly on their way to Ukraine, and investors believe the deployment might be a long-awaited inflection point for the young defense contractor. Shares are rallying as a result, up as much as 15% on Wednesday.
So what
AeroVironment has long had a relationship with the Pentagon, making small-to-midsize unmanned aircraft (UAV) that are used for reconnaissance and to deliver weapons. But for most of its history the investment case surrounding this company had more to do with its potential sales than with its actual sales. For example, the U.S. Army purchased no AeroVironment Switchblade UAVs in fiscal 2021 after purchasing $48 million worth in 2020 and $183 million worth in years prior.
Image source: Getty Images.
The conflict in Ukraine could accelerate demand for the Switchblade, which the Army refers to as the Lethal Miniature Aerial Missile System (LMAMS). On March 16, President Joe Biden announced $800 million in security assistance to Ukraine including "100 tactical unmanned aerial systems." Although defense officials have not specified what UAV is being sent, multiple press reports say it is the Switchblade.
The Switchblade costs about $75,000 per unit. The Army has requested $68 million in fiscal 2022 to purchase 900 LMAMS, but that number could shift if units are sent to Europe instead of added to Army stocks.
Now what
Baird analyst Peter Arment believes more orders are likely to follow. On Wednesday, the analyst raised his price target on AeroVironment to $95 from $72 and kept his outperform rating, saying he expects demand for the Switchblade to grow over the next 12 to 24 months as the Pentagon increases its buying and NATO allies begin to build out their inventories.
AeroVironment has historically been one of the more volatile aerospace stocks, trading as high as $128.98 and as low as $52.03 in the last year alone. Investors have always been drawn to the promise of its UAVs, but unclear on when that promise might translate into sales. The latest White House move provides evidence that the government values the products AeroVironment makes, and investors are buying in as a result.
