"This stock's got potential." It's a phrase calculated to spark investor interest, but it's also loaded with multiple meanings. AeroVironment
AeroVironment certainly has the potential to displace Northrop Grumman's
Yet for all its potential, AeroVironment hasn't done a very good job lately of executing on any of it.
Potential vs. actual
Or at least that's my read on the situation, after reviewing AeroVironment's first quarterly report of fiscal 2011, released this week. Once again, AV has underwhelmed investors with a report of weak revenue growth (1%year-over-year), this time combined with an admission of operating and net losses. Worse still, the sharp revival in free cash flow we saw last quarter was sadly lacking in Wednesday's report. With free cash flow turning negative, the company's rate of annual cash generation dipped to just $19.6 million.
Granted, the stock's price also fell. With analysts predicting long-term annual earnings growth of 25%, and a valuation of about 25 times free cash flow on the stock, you might think this makes for a "potential" profit opportunity in AeroVironment shares -- but I'm not so sure.
Consider: According to AeroVironment, revenue growth this year will fall far short of 25% -- just 10% to 15% is all management can promise us. Worse, operating profit margins on those revenues are expected to slip.
To me, this all adds up to another year of little to no profit growth at AeroVironment -- and little or no chance that this stock will live up to its potential in 2011.
Fool contributor Rich Smith regrets to say that he owns shares of AeroVironment, which is also a Motley Fool Rule Breakers recommendation. Ford Motor is a Motley Fool Stock Advisor recommendation. True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Motley Fool has a disclosure policy.