Will AeroVironment Pull Out of Its Tailspin?

Drones come in all sizes and shapes. Source: AeroVironment.

Recent advances in drone technology have inspired all sorts of new ideas about their use, ranging from remote surveillance to home delivery. AeroVironment (AVAV 1.57%) remains one of the major players in the budding drone industry, with its military expertise in unmanned aerial vehicles giving it a clear head start in adapting to whatever the commercial market will bear. Yet over the past year, AeroVironment's stock has fallen sharply as investors have not seen the pace of sales growth they've wanted, and profits have turned into losses in recent quarters. With the company expected to announce fiscal third-quarter results on Tuesday, AeroVironment shareholders are bracing for another sluggish quarter, but they'll also want to see signs of a rebound in 2015. Let's take an early look at what has held AeroVironment back and whether it can gain ground in the coming year.

Stats on AeroVironment

Source: Yahoo! Finance.

Will AeroVironment earnings soar or crash-land?
Investors have throttled back on their views about AeroVironment earnings in recent months, cutting their estimate for the quarter ended in January by 25% and reining in full-year fiscal 2015 and 2016 projections as well. The stock has continued its slump, falling another 7% since late November.

Source: AeroVironment.

AeroVironment took its biggest hit immediately following release of its fiscal second-quarter results. Revenue for the quarter fell 19% from the year-ago period, with a dramatic decrease in sales of unmanned aircraft systems more than offsetting gains from its efficient energy systems segment. The company reversed a year-ago profit with a loss of $0.13 per share, as higher overhead and research and development expenses further weighed on AeroVironment's bottom line. The results led some investors to doubt whether AeroVironment has chosen the right strategy to make the most of its business opportunities.

Yet the real question facing AeroVironment is whether it can realize the full potential of a growing commercial drone industry. The Federal Aviation Administration has been developing guidelines for regulating drone use, with the dual needs to preserve aviation safety and leave room for innovation and experimentation. So far, the best chances for success appear to be in expanding drone use for applications in remote and relatively unpopulated areas, such as agricultural monitoring, oil and gas surveying, and mapping operations. However, current proposals that would require all drone operators to have private pilot's licenses would create an onerous burden on the expansion of UAV use, and that could hurt AeroVironment's growth prospects.

PosiCharge fast-charging systems. Source: AeroVironment.

One area most investors pay little attention to is AeroVironment's role in the electric vehicle industry. AeroVironment produces PosiCharge systems, which help industrial users of electric vehicles recharge their batteries quickly and efficiently. The company already counts major airlines and other industrial users among its customers, and the potential to carry that expertise into the consumer market holds some promise for it.

In the AeroVironment report, look beyond the hype about commercial drones to ensure the company is executing on its current core business prospects. Many investors are betting on AeroVironment's ability to capitalize on the industry's long-term potential, but the company also must demonstrate it can grow in other directions. With drone regulations not due out until late this year, AeroVironment's 2015 results will rely on its ability to get a turnaround started sooner rather than later.