What goes up, must come down. That's an ironclad law of gravity for airplanes -- and for AeroVironment (NASDAQ:AVAV), the small-cap maker of robotic airplanes ("unmanned aerial vehicles" or "drones") for the U.S. military.

Not all AeroVironment drones are small. The experimental Global Observer is huge -- and will have a big impact on profitability this year. Photo: AeroVironment

Last night, AeroVironment reported earnings for its first fiscal quarter of 2015. In contrast to the "earnings beat" reported two months ago, which sparked a 13% surge in AeroVironment stock, last night's results ended in a 5% after-hours sell-off. But why?

Here's how fiscal Q1 2015 went down for AeroVironment:

  • Revenues came in at $51.9 million, up 18% from last year's Q1 and ahead of analyst estimates -- but growing only half as fast as what we saw in Q4 2014.
  • Gross profits grew even slower, up only 12%.
  • The company reported an operating loss of $6.5 million.
  • And a $0.16-per-share loss on the bottom line.

So, was this good news or bad news?

The CEO's view
Commenting on the results, AeroVironment CEO Tim Conver pointed out that "combined with 25 percent growth in funded backlog over the fourth quarter of fiscal 2014 and cash flow from operations of $14 million," AeroVironment's smaller-than-a-year-ago losses "demonstrate continued momentum across our businesses." And viewed from one perspective, he's right. This was good news.

AeroVironment's net loss for the quarter was just half the loss recorded in fiscal Q1 2014 ($0.32 per share). What's more, free cash flow continues to come a-gusher, with Q1's cash profits topping $14.3 million, a big improvement over last year's Q1 cash burn of $17.6 million.

What the numbers tell us
However, AeroVironment's loss was still about twice what analysts had been expecting, with an S&P Capital IQ poll of analysts having arrived at a consensus expectation of just $0.09 per share in losses prior to the news coming out. Meanwhile, looking forward, management is still expecting full-year revenues to come in at anywhere from $250 million to $270 million, and expects to earn historically low gross margins of only between 34.5% and 37.5% on these revenues. AeroVironment also still expects investments in growing its "Tactical Missile Systems, Commercial UAS and Global Observer business areas" will consume most of these gross profits, leaving the firm with essentially no "operating profit" throughout the rest of this year.

Foolish takeaway
Investors are selling AeroVironment stock today on worries about this lack of profitability. Indeed, just this morning, analysts at Sterne Agee reiterated their "neutral" rating on the stock, warning that "we have cut our FY15 EPS estimate by $0.10 to zero." But if you ask me, they're making a mistake.

While technically, "GAAP" profits may have gone missing temporarily, AeroVironment has now generated $53.7 million in positive free cash flow over the past 12 months. That's more than three times the company's reported profits, and puts AeroVironment stock at a price to free cash flow ratio of just 13.5 today.

For a firm with long-term growth targets of 14% annualized (according to S&P Capital IQ figures), a growing backlog, and a focus on the future that doesn't seem an unreasonable valuation.

Rich Smith has no position in any stocks mentioned. The Motley Fool recommends AeroVironment. The Motley Fool owns shares of AeroVironment. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.