Tuesday, September 16, 2008

Bookkeeping: New Position #2 - AeroVironment (AVAV)

Second new position is AeroVironment (AVAV) which is a name I have been watching for about a month. This company benefits from one of America's growth industries - war. (not a political statement - just the facts)

AeroVironment, Inc. engages in the design, development, and production of unmanned aircraft systems and energy technologies for various industries and governmental agencies. The company offers small unmanned aircraft systems (UAS) that provide intelligence, surveillance, and reconnaissance, including tracking, combat assessment, and geographic data to the small tactical unit or individual war fighter.

They also have a clean energy group - our buddy over at Marketfolly wrote a nice piece in June (which I frankly glossed over) but when it crossed my screens I took a second look. Now if we were talking 120 days ago we'd be interested in this name for the clean energy angle since crude oil is clearly going to $200; nowadays we like it for the defense angle as crude oil is clearly going to $30. (notice the overreaction in both directions? human fear v greed) The fact is when energy comes into favor you can have a company with its hand in both cookie jars. So it's interesting from that perspective, but the foundation of the company are the unmanned drones which is 80%+ of revenue - 15% is from their "efficient energy" technologies.

Here is a link to their company overview presentation from July 08.

Let's look at the chart - another solid year to date performance running from $24s to the mid $35s. When it crossed my radar it was in the $30-$31 range. While I was watching the company reported earnings last Tuesday evening (remember that was the huge down day following Bailout Monday) so the stock was in the mid $29s - it opened the next morning in the mid $33s and then jumped to mid $35s. So instead of chasing it there we waited. This is a market where almost all gains are given back, and many in short order. So by remaining patient we got the pullback today to the 50 day moving average of mid $31s. We bought just above that. Again our favorite type of chart, but one you need to be careful of because a break of support could lead to bad things. A close below $31 would have us cutting back out of respect for the danger in this market.

Here is a link to the full report of last earnings for the non HAL9000 types. AP summary here.
  • Shares of AeroVironment Inc. surged Wednesday after the maker of unmanned aircraft systems reported strong fiscal first-quarter earnings and several analysts raised their price targets and earnings estimates on the California company.
  • Shares jumped $4.49, or 15.3 percent, to $33.88 in midday trading. Earlier in the session the stock traded at $35.63, its highest point since going public in January 2007.
  • For the three months ended Aug. 2, profit rose to $4.8 million, or 22 cents per share, from $3.8 million, or 18 cents per share, in the year-earlier period. Analysts polled by Thomson Reuters expected, on average, 18 cents per share.
  • The Monrovia, Calif.-based company said continued progress in its liquid hydrogen-powered unmanned aircraft business lifted revenue by 9 percent to $53.6 million from $49.2 million.
  • Both SunTrust Robinson Humphrey analyst Chris Donaghey and Stifel Nicolaus analyst Troy J. Lahr raised their fiscal 2009 earnings per share estimate to $1.20 from $1.18. Friedman, Billings, Ramsey analyst Patrick McCarthy raised his profit estimate to $1.16 per share from $1.13.
  • Donaghey raised his price target to $36 from $32, Friedman, Billings, Ramsey's McCarthy reiterated his $37 price target and Goldman Sachs analyst Richard Safran increased his price target to $27 from $25.
One thing I liked in the earnings report was the continued growth in backlog
  • As of August 2, 2008, funded backlog (unfilled firm orders for which funding is currently appropriated to us under a customer contract) was $108.9 million compared to $82.0 million as of April 30, 2008.
Conservative Guidance
  • For fiscal year 2009 the company maintains its guidance of revenue growth of between 20% and 25% over fiscal year 2008, with an operating income margin of between 12% and 14%.
The company has a non typical year end of April, so it's 2008 year ends April 09; based on current estimates it has a forward PE of 28. Since I have global growth stocks with forward P/Es of 5-7 that no one wants to own, I guess we have to pay near 30 for the current market favorites.

There is a lot of competition in this space from defense contractors but AeroVironment is a specialist instead of a generalist (i.e. they focus on this unmanned aircraft segment) and as an example just from the "ooh ahh" perspective is this piece from Motley Fool.
Perhaps the most startling news contained in AV's release this week concerned its recent DARPA-award to develop a "hover/perch and stare" UAV. This miniature airplane can fly to a target location, land there, and keep an eye on things from a perched position. When it's done, it can take off from its perch and fly back to base. (my comment: whoa - cool)

As you may recall, AV only announced its win on this contract three weeks ago. Now CEO Tim Conver tells us: "we are developing and have now demonstrated a new aircraft based on our one-pound Wasp that can perform vertical take-off and landing, hobbler, perch and steer machines in a very stealthy manner" [emphasis added].
Ok, I don't buy stocks on sex appeal but having a drone that can act like a bird is pretty darn sweet. ;) To top if off, Investors Business Daily has a piece on the defense industry with a focus on AeroVironment last Friday
  • AeroVironment showed investors once again last week how some military contractors are in a growth mode. The company -- which makes unmanned aircraft for the U.S. Army, among others -- saw shares jump 18% to 34.73 on Sept. 10, a day after reporting impressive first-quarter results.
  • Earnings per share for the quarter that ended Aug. 8 climbed 22% from the year-ago period to 22 cents, well over analysts' forecasts of 18 cents per share. Revenue shot up 9% to $53.6 million, topping estimates by 7%. Its funded backlog of orders climbed 33% to $108.9 million from the previous quarter.
  • It's one of the key stocks in IBD's military electronics group, which as of Friday ranked No. 3 out of 197 industry clusters. (hello - growth industry) Many of the stocks in the group focus on cutting-edge military systems that help improve military intelligence and surveillance. The products include thermal-imaging gear for spotting combatants, unmanned planes equipped with high-powered cameras, and technology that helps gather wireless communications from enemies.
  • With the war in Iraq showing more signs of success, some might think military contractors are heading for the bunker. Hardly. The U.S. military is preparing for a future beyond Iraq, and it's tapping a myriad of companies to do it.
  • AeroVironment has made its name building airplanes small enough to carry into battle and launch by hand. Despite its size, the plane also comes with enough camera and communications equipment to let a soldier see what the enemy is doing behind a ridge or in the next valley.
  • The companies tend to keep their contracts if the military likes their performance, even if a rival bids lower, Lewis says. Once a contractor has proven itself, it will try to win contracts for more advanced or larger orders.
  • "The U.S. has the largest defense budget in the world." (growth industry) The U.S. defense budget has been on the upswing during the Afghanistan and Iraq wars. The Congressional Budget Office reports the military budget has grown from $364 billion in fiscal 2001 to $622 billion in 2007. (did I mention growth industry?)
  • AeroVironment is trying to up the ante with what it calls the "Switchable," which can not only provide pictures to soldiers, but identify targets and fly into them, Kamikaze-style.
We started this position with a 1.3% stake in the upper $31s.

Long AeroVironment in fund; no personal position

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