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Unappealing Growth From AeroVironment
Despite major cutbacks to defense spending as a result of record federal debt levels, there are pockets of industry growth. Spending on combating cyber warfare remains on a secular uptrend, as does the advent of drones and other unmanned aircraft systems (UAS). AeroVironment, Inc. (Nasdaq:AVAV) is one of the only pure plays in the second category, and reported full-year results on Tuesday that demonstrated a solid sales growth trajectory. Unfortunately, this is one of the few positive aspects of the firm's investment appeal.
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Full Year Recap
Revenues advanced 17% and reached nearly $293 million. Management stated this was ahead of its internal expectations. Product sales made up just more than 47% of sales and the rest consisted of contract services related primarily to smaller UAS, including repair and replacement of the devices as well as training and the development of customized UAS and data gathering.
Net income rose 25.1% to $25.9 million, as a 46% jump in R&D costs was offset by moderate growth in cost of sales, a slower rise in SG&A expense and lower income tax expense. Slightly higher shares outstanding tempered the earnings increase to 24.5% for earnings per diluted share of $1.17. (For related reading, see Investors Beware: There Are 5 Types Of Earnings Per Share.)
Outlook
As of the end of the year, AeroVironment's backlog was $82.9 million, or more than a quarter of the $321 million to $336 million it projects in revenue for the coming year. It expects earnings between $1.28 and $1.35 per diluted share, or year-over-year growth in a range of 9.4% and 15.4%.
Continued sales growth should eventually flow to the bottom line, but at a forward P/E of almost 26, the lofty earnings valuation already discounts a fair amount of future profit increases. So, despite a business that is one of the few to be growing in the defense industry, larger players including Lockheed Martin (NYSE:LMT), Raytheon (NYSE:RTN), L-3 Communications (NYSE:LLL), and Northrop Grumman (NYSE:NOC) look like more solid investment candidates, even though their sales are likely to struggle over the near term. Their appeal lies in their leadership positions in the industry, diversified sales streams, steady profit generation, and low earnings valuations.
The Bottom Line
AeroVironment has posted steady sales growth over the past five years, and the top line has risen more than 68% since 2007. Profit trends have been more erratic, but should finally exceed the $1.22 per diluted share the company reported in 2007. Unfortunately, cash flow has fallen for three straight years as inventories have increased sharply. (For more, see How To Use The P/E Ratio And PEG To Tell A Stock's Future.)
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Full Year Recap
Revenues advanced 17% and reached nearly $293 million. Management stated this was ahead of its internal expectations. Product sales made up just more than 47% of sales and the rest consisted of contract services related primarily to smaller UAS, including repair and replacement of the devices as well as training and the development of customized UAS and data gathering.
Net income rose 25.1% to $25.9 million, as a 46% jump in R&D costs was offset by moderate growth in cost of sales, a slower rise in SG&A expense and lower income tax expense. Slightly higher shares outstanding tempered the earnings increase to 24.5% for earnings per diluted share of $1.17. (For related reading, see Investors Beware: There Are 5 Types Of Earnings Per Share.)
As of the end of the year, AeroVironment's backlog was $82.9 million, or more than a quarter of the $321 million to $336 million it projects in revenue for the coming year. It expects earnings between $1.28 and $1.35 per diluted share, or year-over-year growth in a range of 9.4% and 15.4%.
Continued sales growth should eventually flow to the bottom line, but at a forward P/E of almost 26, the lofty earnings valuation already discounts a fair amount of future profit increases. So, despite a business that is one of the few to be growing in the defense industry, larger players including Lockheed Martin (NYSE:LMT), Raytheon (NYSE:RTN), L-3 Communications (NYSE:LLL), and Northrop Grumman (NYSE:NOC) look like more solid investment candidates, even though their sales are likely to struggle over the near term. Their appeal lies in their leadership positions in the industry, diversified sales streams, steady profit generation, and low earnings valuations.
The Bottom Line
AeroVironment has posted steady sales growth over the past five years, and the top line has risen more than 68% since 2007. Profit trends have been more erratic, but should finally exceed the $1.22 per diluted share the company reported in 2007. Unfortunately, cash flow has fallen for three straight years as inventories have increased sharply. (For more, see How To Use The P/E Ratio And PEG To Tell A Stock's Future.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Ryan C. Fuhrmann
Ryan C. Fuhrmann, CFA, has a background in portfolio management, overseeing assets for high-net-worth individuals and covering a broad array of industries from a generalist perspective. An active student of investing, he focuses on communicating his ideas as an investment writer and learning from the financial community. Ryan is also actively involved with the CFA Institute. Feel free to visit his website at www.rationalanalyst.com.
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