As the Ukraine-Russia conflict took center stage this year, major defense names came to the fore after grabbing investors’ eyeballs. Northrop (NOC), Lockheed Martin (LMT), and Raytheon Technologies (RTX) are all up in double digits over the past 12 months.
In contrast, AeroVironment (AVAV), the maker of the Switchblade drones, is down about 20% in the same period. Its recent guidance failed to cheer investors, and the stock has dropped 12% in the past month alone.
Nonetheless, a deeper look under the hood indicates a number of long-term factors at play for this company that warrant attention.
AVAV’s Improving Financials
While AVAV’s recent guidance may have been less than expected, the company is improving its fundamentals on a longer timeline. Its top line has expanded from $314.3 million in 2019 to $445.7 million in 2022. The figure is further expected to rise to around $563 million in 2024. In sync, its earnings per share, which contracted from $1.74 per share in 2019 to $1.25 per share in 2022, is also expected to improve to $2.24 per share in 2024.
At the end of Q4, AVAV had a funded backlog of $210.8 million, which provides revenue visibility. The company has seen the impact of supply chain challenges, higher material costs, and labor market pressures, which resulted in a gross margin contraction in Q4.
AVAV is working to address these constraints. It is working with component manufacturers to improve lead times; is buying up inventory to ensure stable supply; and is working with the Secretary of Defense’s Office to prioritize its raw material orders in light of the Ukraine conflict.
AVAV also expects gross margins to improve in the coming periods on the back of an improved product mix.
AVAV’s Promising Business Verticals
AVAV’s solutions bring together robotics, sensors, software analytics, and connectivity. Compared to its larger peers, AVAV’s market cap stands at only $1.94 billion and the company is already into key business segments, such as small unmanned aircraft systems (Small UAS), tactical missile systems (TMS), medium unmanned aircraft systems (MUAS), and high altitude pseudo satellite systems (HAPS), as well as unmanned ground vehicles (UGV).
Additionally, AVAV is also seeing gains from its earlier Arcturus, Telerob, and Intelligent Systems Group of Progeny Systems Corp (ISG) acquisitions.
Impact of the Ukraine War
The Russia-Ukraine conflict has put the spotlight squarely on AVAV’s offerings, and the company expects to be a beneficiary of domestic and international demand in the future.
AVAV’s Switchblade is playing a major role in the conflict given its long range, loitering time on target, and precision and wave-off capabilities. The company is already seeing increased interest in its TMS product line as a result. Ukraine has asked for more of these weapons, and AVAV should benefit from the military aid earmarked for Ukraine.
On a longer timescale, this advantage should further help AVAV. The U.S. Army is seeking to procure Switchblades for the European theatre, and AVAV has already secured regulatory approval to provide Switchblades to over 20 U.S. allies across the globe. Additionally, the company is also witnessing higher demand for its other small and medium UAS offerings, including Puma, Raven, WASP, and JUMP 20.
Moreover, AVAV is also seeing interest in its UGV product line from Asia and Europe, and the company continues to tap additional markets. AVAV’s UGVs are gaining the spotlight as the Ukraine war demonstrates the need for solutions to clear mines and other explosives.
Wall Street Is Bullish About AVAV
Despite the recent slide in share price, the Street has a Strong Buy consensus rating on the stock alongside a price target of $97, which implies a 26.48% potential upside.
Cathie Wood Raises Stake in AVAV
Along with analysts, hedge funds are also very positive about AVAV and have increased holdings in it by 201,200 shares in the last quarter.
Notably, two major names have increased their holdings in AVAV. Cathy Wood’s ARK Investment Management has increased holdings by 20.45% and Ken Fisher’s Fisher Asset Management has increased holdings in AVAV by about 6%.
Closing Note
For the savvy investor, the recent decline in AVAV shares should look like an opportunity. The Ukraine conflict has introduced newer war strategies where video gamers are using drones to obliterate battle tanks.
The conflict is closely watched by military heavyweights globally, and lessons from the war will be implemented. AVAV stands to benefit as a consequence where its solutions are already in play.
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