The International Consumer Electronics Show (CES) in Las Vegas this week is an influential venue for a parade of gee-whiz gadgets right out of science fiction. CES wraps up today and reported a record attendance of 160,498. Stealing the spotlight was unmanned aerial vehicles (UAVs), pilotless drones that are migrating from military to civilian use. For the first time in the show’s history, CES set aside a separate section dedicated to just drones.
A great play now on this trend is AeroVironment, Inc. (AVAV), the leading manufacturer of pilotless drones — especially miniaturized ones with highly specialized tasks.
Drones: They’re Not Going Away
In the military sector, the UAV is revolutionizing the use of power in combat regions around the world, especially in “hot spots” in Afghanistan and Iraq, where Pentagon and CIA planners are increasingly deploying UAVs in the fight against terrorism and local insurgents. Even in the face of imminent military belt-tightening in many countries, UAV procurement will generally remain robust because these sophisticated machines are seen as not only effective, but also cost-efficient.
They’re also seen as a way to reduce military casualties in an era when the public shows little stomach for putting troops in harm’s way. UAVs are always willing to die for their country.
California-based AeroVironment provides a wide variety of drones that’s prized by the military, but it also makes a host of smaller UAVs for non-military purposes.
Broadly speaking, as drones increasingly pervade civilian society, AVAV stock should soar higher.
Online retailing giant Amazon.com (AMZN) made headlines in late 2013 with its announcement that it intended to develop a program whereby its packages are delivered to customers’ doors via drones. The scheme seems far-fetched, but considering advancements in drone technology it’s not all that improbable. The biggest hurdle is reconciling growing civilian drone use with FAA regulations, which remains a thorny issue.
In the meantime, though, increasing numbers of federal organizations such as the Coast Guard, the Forestry Service, and Border Patrol — as well as local police departments — are adopting UAVs for airborne surveillance and monitoring.
AVAV: Investing in Growth
For the second quarter of fiscal 2015, AeroVironment reported a robust order backlog in its small UAV segment of $125 million, a sequential increase of 50%. The company reaped major new contact wins in the quarter, including a $22 million award from the U.S. Marine Corps for their next-generation drone.
AeroVironment reported revenues of $104.5 million for the first six months of fiscal 2015, down 4% from the first six months of fiscal 2014, largely due to temporary decreases in military demand.
Loss from operations during the period was $10.6 million, compared to loss from operations during the same period a year ago of $3.2 million. The higher loss resulted from the dip in revenue, but also from greater research and development (R&D) expenses, as the company positions itself for exploding demand in 2015 and beyond. As of Nov. 1, 2014, the company’s funded backlog of firm orders stood at $125.2 million, compared to $65.9 million as of April 30, 2014.
For fiscal 2015, AVAV management expects to generate revenue of between $250 million and $270 million and gross profit margin of between 34.5% and 37.5%.
The Bottom Line
One of the hottest technology trends today is the UAV, which shows signs of invading all aspects of not just military but also paramilitary and even civilian life. As the biggest and most experienced maker of UAVs, AeroVironment is in the best position to capitalize on the bonanza.
For patient investors willing to ride out the company’s R&D gestation periods and occasional hiccups in military procurement, AeroVironment stock over the long haul should put profits on the radar.
As of this writing, John Persinos did not hold a position in any of the aforementioned securities.
