Less than a month after research firm and short seller Spruce Point issued a highly critical note on the operations and valuation of drone maker AeroVironment, Inc. (NASDAQ: AVAV), the company has reported an impressive set of numbers for its fiscal second quarter, trashing market estimates and laying waste to Spruce Point’s forecast of a 30%-50% decline in its stock.
Shares in AeroVironment launched into a 26% rally Wednesday, and closed at an all-time high of $54.47. Year to date, the stock has gained 103%.
So, can investors expect more from the gravy train? For an answer to that let’s look at what happened in AeroVironment’s all-important second fiscal quarter.
What’s Behind AeroVironment, Inc. (NASDAQ: AVAV)’s Impressive Beat?
Quite simply, it seems the company’s unmanned aerial segment (UAS, aka drones) pulled out all the stops.
The drones’ business bumped up sales during the quarter by a whopping $23 million (+57%), driving overall sales higher by 47% to $73.8 million, and swinging the company around to a profit (EPS of +$0.29) from a loss (EPS of -$0.18) in the corresponding period last year.
The result blew away analysts’ forecasts of sales of $63.5 million and a loss of $0.06 per share.
To recap, AeroVironment, Inc. (NASDAQ: AVAV) is the acknowledged expert and largest supplier of small, unmanned aircraft systems (UAS) to the Pentagon and a host of allied nations. These systems also find application missile systems and in gathering commercial information such as for agriculture, and utility maintenance. The company also manufactures test systems and charging solutions for electric vehicles.
The company’s funded order backlog (unfilled firm orders for which funding is currently appropriated to the company under a customer contract) jumped 49% sequentially to $127 million, which CEO Wahid Nawabi said would significantly increase revenue visibility for the current fiscal year.
The runaway growth in sales was not at the cost of profitability. Gross margin as a percentage of revenue moved up to 42% from 35% last year.
What about cash?
During the first six months of this year, AeroVironment generated positive free cash flows of $18.3 million. In contrast, the company reported negative free cash flow of -$10.8 million in the corresponding period last year. That’s quite a turnaround.
In a nutshell, the company is doing well on all the fronts of sales growth, profitability, cash generation and order intake.
AeroVironment, Inc. (NASDAQ: AVAV) Outlook
In its guidance for the full year of fiscal 2018, the company stuck to its expectations of revenue between $280 million and $300 million, and earnings per diluted share of between $0.45 and $0.65. However, this may be conservative, given the growth momentum in revenue and margin.
Longer term, investors should keep in mind the following:
- The company earned a top tier placing in the United States Army’s annual Superior Supplier Incentive Program ranking, which identifies its top performing industry partners for 2017. This was based on the performance of the company’s products in the small UAS and TMS businesses.
- The company is growing its leadership in the global small UAS market.
- Robust demand is evidenced by growing funded order backlog.
- The company is positioning itself for a combined $100 million opportunity in TOGA (a next-generation ground control station referred to as Tactical Open Government Architecture by the Army) and the FCS (Frequency Control System).
Investors may consider buying shares in AeroVironment, once the stock corrects from its result-induced, gap-up bounce and the resultant short-covering.
Feature Image of “U.S. Army 1st Lt. Steven Rose launches an RQ-11 Raven unmanned aerial vehicle near a new highway bridge project along the Euphrates River north of Al Taqqadum, Iraq, on Oct. 9, 2009” :
In body image of UAS: AeroVironment website