Shares of innovative defense contractor AeroVironment (AVAV 4.98%) soared 20% higher this week as of market close on Thursday, according to data provided by S&P Global Market Intelligence.
Not only did AeroVironment receive five price target raises from analysts, but it landed a new $499 million contract with the U.S. Air Force Research Laboratory (AFRL).
The combination of these events -- and perhaps some optimism from the company's investor open house on Tuesday -- pushed shares to new all-time highs.
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How important is AeroVironment's new contract?
This single-award, 10-year contract will see AeroVironment help the AFRL with its High-Performance Electromagnetic Spectrum Survivable Materials Advancement (HELMSSMAN) program.
Specifically, the company will "mature material technology development and deploy protective solutions to the frontlines, guarding warfighters against exposure to harmful electromagnetic radiation."
This contract is noteworthy for two reasons.
First, this nearly $500 million deal boosts AeroVironment's $4.2 billion backlog by more than 10%. Spread over 10 years, this contract could add three percentage points of growth to the company's sales, which should be around $2 billion this year.
Second, the contract shows that AeroVironment is quickly evolving into a more sophisticated defense contractor, moving beyond its traditional drones and loitering munitions offerings.
Following its recent Blue Halo acquisition, the company is now home to the equipment (ground robots and drones, for example), software systems, and continuous research and development needed to become a leader in its niche.
However, as promising as these developments are for AeroVironment, it now trades at 99 times forward earnings, so this valuation already accounts for a lot of optimism.
Interested investors may want to consider buying in segments over time, rather than going all in at today's lofty valuation.
