In yesterday’s StreetAuthority Stock of the Month, Editor Amy Calistri recounted a conversation she had at a party that made her realize drones, or unmanned aerial vehicles, aren’t just for the military anymore. Below is her favorite stock to capitalize on the likely spread of drone technology to domestic law enforcement agencies, universities, government agencies and more.
“A lot of companies develop good products in their respective sectors. There are very few companies that can be called visionary. AeroVironment, Inc. (AVAV) may be one of them. The company was founded in 1971 by Dr. Paul MacCready, an aeronautics scientist whom Time Magazine called one of the ‘greatest minds of the 20th Century.’ While few have heard of AeroVironment, more people may be familiar with the company’s Gossamer Albatross. In 1979, it became the first fully human-powered aircraft to cross the English Channel and is now on display at the National Air and Space Museum in Washington D.C.
“AVAV’s move into unmanned aircraft grew out of the company’s development of solar-powered vehicles in the 1980s. The first solar-powered, unmanned aircraft, the Pathfinder, was built by AVAV — and is also on display at the National Air and Space Museum. The Sunraycer, designed by AVAV, won the first solar-powered car race in Australia in 1987. The Sunraycer is on display at the Smithsonian National Museum of American History. The Nano Hummingbird, [a tiny UAV] is also an AVAV invention.
“How many companies have even a single invention worthy of placement in a national museum?
“Although it is primarily an unmanned vehicle systems supplier, the California-based company also supplies charging stations for electric passenger vehicles, accounting for roughly 16% of the company’s revenues.
“AeroVironment was also a pioneer in electric vehicles, developing the first concept cars for General Motors in the early 1990s. Today, it supplies remote charging stations for both consumer and commercial use. Mitsubishi Motors recently partnered with AVAV to supply the home-charging stations for its new electric-powered 2012 Mitsubishi i.
“Both of AVAV’s divisions are firing on all cylinders. For the quarter ended October 29, 2011, revenues at AVAV’s UAS segment were up 24.8% over the same quarter in 2010, while revenues in the energy system segment rose 32.2%. The company earned $0.30 per share, compared with the $0.01 AVAV earned in the same quarter a year earlier.
“The stock is off its highs as concerns weigh on the defense sector in general. Specifically, the Army intends to cut back on orders of AVAV’s Raven system (featured in the movie ‘Act of Valor’). This news in early February sent AVAV’s share price down 5%, which I view as a buying opportunity. After all, the U.S. Army isn’t the Raven’s only customer. Australia, Estonia, Italy, Denmark, Spain and the Czech Republic already use the Raven. The U.S. government also supplies Ravens to foreign countries for military and peacekeeping missions.
“There could be some disruptions to AVAV’s order flow due to flux in the military budget. And that could affect the next quarter or two. But I believe the long-term story is domestic drone demand. And I’m willing to weather the bumps now for the benefits later. And it’s not like the U.S. military has stopped ordering.
“AVAV recently announced that it received a new $4.2 million order from the U.S. Air Force for its Switchblade System, a remote weapons system. AVAV also announced that it had conducted a series of live demonstrations of Switchblade for multiple U.S. government customers in December 2011.
Risks to Consider
“Small-market-cap companies like AVAV are normally more volatile than the overall market. Concerns relating to the defense sector could exaggerate this volatility. AVAV is scheduled to release its results for the quarter ended January 8 on May 6. Historically, AVAV has experienced large stock price moves — in either direction — the day it announces its results.
Action to Take
“I plan to buy 250 shares of AVAV on the morning of March 2. If, however, AVAV’s price is above $31 per share at that time, I will only buy 125 shares — or half my position — at the market price.”
– Amy Calistri, StreetAuthority’s Stock of the Month, 2/29/12