In its first year as a public company, AeroVironment (NASDAQ:AVAV) turned in results that beat expectations in every single quarter. But can this high-tech model-airplane maker repeat the feat in year two? We'll get out first clue on Monday, when AV reports its (fiscal 2008) third-quarter earnings news.

What analysts say:

  • Buy, sell, or waffle? Seven analysts rate AeroVironment. Three say it’s a buy, and four say "hold."
  • Revenue. On average, they expect to see sales rise 19% to $54.9 million.
  • Earnings. Profits are predicted to fall 54% to $0.26 per share.

What management says:
Despite growing its sales at this same 19% pace last quarter, AV's profits declined on a lower gross margin, as well as higher costs in the selling, general, and administrative (SG&A) and research and development (R&D) areas. Expect more of the same in the second half of this year, wherein the company told us we will see revenue grow 20% to 25%, while operating margins range between 12% and 14%.

What management does:
So far, so right. After a fiscal Q1 in which it demonstrated superb growth, AeroVironment seems to have settled into a flight pattern of steady sales growth in the high teens. Sales were up 34% in H1 2007, but continued 19% growth would move us closer and closer to that 20%-25% target (unless, of course, management lowballed us on its expectations).

Meanwhile, it looks like we should expect further margin compression -- operating margins have fallen for two quarters straight, but they aren't yet down to 14%, much less 12%. But hey, even if AV does drop down to 12%, it'll still be making better margins than UAV-building brethren Lockheed Martin (NYSE:LMT), Northrop Grumman (NYSE:NOC), Boeing (NYSE:BA), and General Dynamics (NYSE:GD).

At AV's targeted level of profitability, it will be neck-and-neck with Honeywell (NYSE:HON) and Textron (NYSE:TXT), which earn 12% and 13%, respectively.





























All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Now let's assume that management is correct in its predictions for a moment. 20% to 25% growth is more than you'd expect out of a lot of companies -- certainly more than we're likely to see at the more diversified, more mature defense contractors named above. And it seems that despite slipping margins, AV is doing a fine job of earning a profit on all this growth. What risks, though, might clip this growth story's wings? What should we be keeping an eye on?

In two recent columns, "Hey! Who's Flying This Thing?" and "Hey! Who's Flying This Thing? Part 2," I outlined both the promise and the peril of AV's UAV business. Namely, the promise that the U.S. military is greatly expanding its use of, and spending on, UAVs. And the peril that this spending appears to be tilting toward larger UAV systems such as Northrop's Global Hawk and General Atomics' Predator. 

Tiny AV has had great success to date in selling its equally diminutive airplanes to the military, and I suspect it will do well within its niche in the future. But I do think there's one mistake we'll want to avoid making: Don't assume that big increases in UAV spending will necessarily lead to similar growth in AV revenue. The big boys seem intent on hoarding the bulk of this wealth.

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