In its second earnings report ever, unmanned aerial vehicle maker AeroVironment
Result: The stock fell 4%.
Yeah, that was pretty much my reaction, too. I mean, by just about every measure, AeroVironment outperformed. It hit the top of its sales guidance range, exceeded operating margin guidance (coming in at 18% for the year), and even "beat by a penny" on earnings (if you care about those things.) But after doing so much right, the firm must have done something wrong, right? Or else, why the decline in share price? Let's examine a few possible culprits.
Free cash flow
Perhaps AeroVironment reported strong GAAP earnings, but weak actual cash profits? Perhaps, but we can't say for sure -- because like all too many U.S. companies, AeroVironment failed to provide its investors a cash flow statement to review with its earnings release. We'll have to put this question aside until the 10-Q comes out.
Sure, last year's growth was great, but what about next year? Well, management predicted it will be a lot like this year, sales-wise. It foresees 20% to 25% sales growth in fiscal 2008. What's more, it predicts 20% to 25% annual sales growth over the next three to five years. That said, management also confided that its funded backlog declined significantly in comparison with this time last year. The $18.8 million shrinkage to $60.9 million may have some shareholders questioning whether AeroVironment will really be able to hit its sales target.
Moreover, whatever sales it posts, investors are often less concerned with past operating margins than what a company expects to make in the future. If that's the case, then management's prediction of 12% to 14% operating margin could certainly have drained some wind from AeroVironment's sales prediction (pun intended, but you may have to look for it.) Sure, that's still better than the single-digit margins posted by rivals like Boeing
Personally, my guess is that it's the last two items that grounded the stock, despite the strong report -- lack of investor confidence in sales predictions, and too much confidence in the likelihood of margins weakening. To boost that confidence, I guess the company will just have to outdo its own predictions again next year.
Learn more about AeroVironment in:
- AeroVironment Lifts Off
- 3 Stocks That Blew the Market Away
- This Just In: Upgrades and Downgrades
- 5 Fresh IPOs
Fool contributor Rich Smith does not own shares of any company named above.