XAR - AeroVironment Continues A Risky Flight Path For Retail Investors

2023-03-20 15:29:15 ET

Summary

• Aerospace and defense industry is an essential industry with customers and suppliers in demand. AeroVironment is a niche player getting a lot of hype and institutional financial support.
• Revenue growth and news stories hype AeroVironment, but steady and sustainable earnings growth and consistent shareholder returns are the missing ingredients to make this stock valuable to small investors.
• Six risk factors are worrisome, but AeroVironment is a potential opportunity to grow in the emerging field of the new dogs of war nations want when needed.

Flying After Diving

The share price of AeroVironment, Inc. ( AVAV ) pops and drops more on news reports about company sales and worldwide events than steady and sustainable earnings growth and consistent shareholder returns. We maintain our Hold Rating, as we claimed in our article last November targeting retail value investors. In our opinion, the current share already factors in our forecast for an EPS of +$1.00 in Q4 '23 over $0.3 for Q4 '22; the next report date is June 23, 2023.

Hobbes charged humans have a natural, "a perpetual and restless desire of power after power, that ceaseth only in Death." Greater power requires more lethal and accurate toys. AeroVironment is a player with market power that other companies might eye for fast and quality growth.

Industry Drives The Company

Aerospace and defense products are the primary revenue drivers for AeroVironment, Inc. It operates through divisions: Unmanned Aircraft Systems ((UAS)), Tactical Missile Systems ((TMS)), Medium Unmanned Aircraft Systems ((MUAS)), and High-Altitude Pseudo-Satellite Systems ((HAPS)). The company supplies mostly governments with UAS, TMS, unmanned ground vehicles, and related services, unmanned aerial and aircraft systems, hand-held ground control systems, spare parts, and accessories. It develops high-altitude pseudo-satellite UAS systems. One analyst includes AeroVironment among the top 3 growth companies in the industry, proving his thesis by citing its plethora of drones for war in Ukraine. Company shares outperform the SPDR S&P Aerospace & Defense ETF ( XAR ).

AeroVironment shares are -3.3% for the last 12 months but +7% year-to-date. Total revenue rose from $314M in 2019 to $445.7M ending April '22. Gross profit dropped. Net Income for FY'22 was -$4,188M compared to +$23.3M in FY '21. Income from operations for Q3 of FY '23 was $4.6M, an increase of $18.7M from Q3 '22 when it suffered a loss from operations of $14.1M. Revenue in Q3 '23 rose nearly 50%. The company ranks 40 out of 62 in the aerospace and defense industry. The Market Cap is $2.27B.

It's A Risky Business

Risk factors in play are

• Short interest is at 5.4% with about 7 days to cover.
• The Beta is currently ~1.17.
• Holdings by hedge funds and corporate insiders decreased in the last 3 months as the share price climbed from about $82 in December '22 to over $90 in mid-March.
• AeroVironment shares enjoy a 4.7 price-to-sales ratio compared to other companies in the defense industry, averaging 2.7 times. At over $90 per share, the current price is on the high side of a fair valuation.
• No dividend is paid.
• SA Factor Grades are not a stimulating investment incentive:

On the positive side, AeroVironment, Inc. assets total ~$920M. Liabilities are about $300M. Debt is $165.7M and equity is $621.5M. That is a satisfactory debt-to-equity ratio of ~27%. However, operating cash flow does not adequately cover the debt; likewise, interest payments are not well-covered by EBIT. The stock is risky for small investors, as it has moved between a 52-week low of $70 and a high of over $114.

Hold On Tight

The aerospace and defense industry in which AeroVironment operates is an essential industry. It seems to forever have customers and suppliers. The company is on the cutting edge of robotic war products that add hype to AeroVironment. Tensions around the world highlighted by reports about drone warfare in Ukraine and the Middle East suggest to us AeroVironment products will grow in demand. That makes us moderately bullish on this stock. The share price might rise on revenue growth for the robotic dogs of war. There seems little risk of a significant drop in the share price.

The strength and resilience of the AeroVironment, Inc. share price might make this relatively small defense company attractive to others pursuing acquisitions by giving them new capabilities. But AeroVironment will continue, in our opinion, to be a risky investment option for retail value investors until the company gets its erratic earnings and cash flow from operations on a steady and sustainable path.

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