by Susan J. Aluise | March 10, 2014 2:32 pm
What do Mark Zuckerberg, Defense Secretary Chuck Hagel and a U.K. Domino’s (DPZ) franchise owner have in common? Innovative ideas for using unmanned aerial vehicles (UAVs), commonly known as drones. With myriad new commercial and military applications, drones might be one of the coolest, highest-potential tech markets around for investors. The next big thing is here: drone stocks.
Zuckerberg’s Facebook (FB) raised the ante in the commercial drone war this week with news of a deal to buy UAV manufacturer Titan Aerospace for $60 million. Titan’s solar-powered UAVs — which can stay airborne for five years at an altitude of 65,000 feet — potentially could enable FB to cost-effectively extend the reach of the Internet and mobile services to underserved rural regions around the globe.
Facebook’s move into drones clearly illustrates the game-changing potential of the technology. But other examples abound, showing how some tech stocks are moving toward becoming drone stocks:
The biggest near-term headwind for commercial drones taking to the air en masse is the Federal Aviation Administration (FAA), which is in charge of U.S. airspace. The FAA needs to make sure that thousands of drones flitting about without flight plans would not pose a hazard for aircraft.
And make no mistake, the FAA takes its job seriously: It recently grounded Wisconsin brewery Lakemaid’s beer-delivery-by-drone plans after the company posted a YouTube video of a delivery to ice fishermen.
Still, it’s only a matter of time before drone applications like this become commonplace. The FAA is under the gun to integrate drones into U.S. airspace by September 2015, but only released its initial roadmap last November. The next big step is expected later this year, when the agency says it will publish rules and requirements for drones weighing less than 55 pounds.
Despite delays, regulatory challenges and privacy dilemmas, widespread commercial deployment of drones is in our future. So what is the best way for investors to play this lucrative new market of drone stocks?
Several aerospace/defense firms stand to gain from broad deployment of UAVs for commercial use. Among them, major U.S. defense contractors like Textron (TXT) subsidiary AAI, Northrop Grumman, Raytheon (RTN), Boeing (BA) and privately held General Atomics are all major players in the drone space.
Perhaps the closest thing to pure play drone stocks is AeroVironment (AVAV), which has sold a number of drones to local law enforcement agencies. AVAV stock spiked more than 20% on Wednesday after it reported earnings and revenue well ahead of expectations. For the quarter ended in January, AVAV stock posted an EPS of 49 cents, blowing away Wall Street’s 19-cent expectations. The company reported revenue of $69.2 million — 47% higher than the year earlier and well above the consensus $63.9 million.
Last month, AVAV inked a deal with Lockheed Martin to jointly pursue UAV opportunities. It has worked with government agencies on the Global Observer, a hybrid-electric, stratospheric reconnaissance and communication drone. It also provides commercial and public safety UAV solutions. Additionally, the company also develops electric vehicle charging stations.
With a market cap of $817 million, AeroVironment’s valuation is rich: It has a price-to-earnings-growth ratio of 6.71 and trades at nearly 66 times forward earnings. But for the risk-tolerant growth investor looking for the next big thing, I like AVAV stock in 2014.
As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.
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