AeroVironment Is Looking for an Updraft

Image source: AeroVironment.

Drones have inspired the imaginations of military strategists and commercial entrepreneurs alike, and for a long time it appeared that niche aerospace player AeroVironment (AVAV 0.49%) would be the obvious winner from the more widespread adoption of this technology. Yet turning the huge potential of unmanned aerial vehicles into real-life applications has gone more slowly than many had hoped, and coming into its fiscal fourth-quarter report on June 30, AeroVironment investors can only hope that another expected quarter of year-over-year earnings declines will prove to be the low point for the struggling stock. Let's take an early look at AeroVironment's prospects and what it is likely to tell us in its report.

Stats on AeroVironment

Source: Yahoo! Finance.

Can AeroVironment earnings gain altitude?
Investors haven't really changed their opinions on AeroVironment earnings over the past several months, still expecting an overall loss for fiscal 2015 but looking for a nice rebound next year. The stock hasn't done much lately, either, falling 2% since late March and generally staying in a comfortable range.

AeroVironment's fiscal third-quarter earnings report reflected some of the difficulties the company has faced recently. Net income fell a whopping 80% from the year-ago quarter, but even that performance exceeded investors' dramatically lowered expectations for the drone maker. Despite the poor bottom-line results, a growing backlog and increasing spending on research and development suggest better times could be ahead for AeroVironment.

One major long-term problem for the company is that sentiment about drones is unquestionably negative right now. A survey from the Pew Research Center found that more than 60% of Americans believe the common use of personal or commercial drones would be a negative change. Even among young adults between the ages of 18 and 29, only 30% think increased drone use would be a positive change, and older adults were decidedly less accepting of unmanned aerial devices.

Still, AeroVironment does have some opportunities to expand commercial use of drones without running into too much negative public opinion. Projects to use drones in relatively unpopulated areas, such as for pipeline monitoring in Alaska, have started out well. So far, these projects aren't making a major contribution to overall revenue, but the growth in the industry is accelerating quickly. With a fairly large head start over would-be competitors, AeroVironment has the capacity to stay ahead of the pack and keep advancing the technology to produce a wider range of drones, from tiny surveillance devices to large-scale carriers of sensor equipment and other larger payloads.

AeroVironment also made some progress in its electric-vehicle charging business during the quarter. In May, the company said its TurboCord Dual charger will be standard equipment with the 2016 Volvo XC90 hybrid electric vehicle. The seven-passenger plug-in hybrid will be the first to include the equipment in a standard package, and AeroVironment sees its TurboCord as a step forward for electric-vehicle charging, given its ability to charge at both 120 volts and 240 volts to take advantage of different power sources. In addition, AeroVironment claims the Level 2 charging device can charge a vehicle about three times faster than standard Level 1 chargers that most electric vehicles use.

In the AeroVironment report, many investors will focus solely on the company's potential expansion into the commercial drone market. Yet for the foreseeable future, military applications will be of paramount importance for the drone maker's results, and continued strength in sales to government entities will be the most likely contributing factor to AeroVironment's success in the next few years. As much as commercial drones get all the attention, long-term shareholders must be patient and allow the market to develop before setting expectations for AeroVironment's prospects in the commercial market too high.