A tiny maker of tiny unmanned aerial vehicles, and also of charging stations for quickly delivering electrons to battery-operated cars, AeroVironment is a company that lives and dies on government policy. If the federal government favors electric cars, AV's Efficient Energy Systems benefits. If the feds fund guns over butter, the company's military drone business flourishes. And this being the case, you'd probably expect the Obama administration -- subsidizing green energy, but pulling troops out of Iraq and Afghanistan -- to be a case study in "good news/bad news" for AeroVironment.
But you'd be wrong. In fact, it was almost all bad news for AV this past quarter:
- Fiscal Q2 2014 revenues of $64.9 million plunged 19% year over year.
- UAV revenues from the "doves" in the Pentagon dropped 14%.
- Meanwhile, electric car revenues under a theoretically "green" administration got crushed -- down 41%.
At the same time, AV's selling, general, and administrative expenses were basically set in stone, declining only a bit. Result: when all was said and done, operating profits at AV dropped by 70%, and net profits declined an even steeper 86%. Free cash flow, which AV had managed to hold at just above breakeven a year ago, plunged deep into the red in Q2 2014 -- negative $15.7 million.
Bad news is better than worse news
Yet it could have been worse. Yahoo! Finance figures show the company meeting earnings estimates for the quarter, a marked improvement after three straight negative earnings surprises. Revenues trumped expectations, and AeroVironment management released guidance confirming that it expects to both collect more revenues, and earn more profits over the course of this year, than analysts had been predicting. The company more than doubled its order backlog, too, which appears to confirm a looming sales rebound.
All of which explains why investors are now so up on the stock. But should they be?
Remember: Even AV's optimistic forecast suggests it will earn at most $0.50 per share in "adjusted" earnings this year. At today's share price, that works out to a more than 60-times earnings valuation on the stock. With most analysts projecting no more than 14% annualized earnings growth over the next five years, 60x earnings seems a pretty rich valuation.
What's more, at $30 a share, AV stock now costs 20% more than it did back in May 2010. That was the last time AV reported full-year revenue of $250 million -- the most it expects to collect this year. Given that I think AV faces tougher headwinds in making military sales today, than it did in 2010, my hunch is the stock should be trading for less today than it did back then -- not more.