U.S. Markets close in 1 hr 43 mins

AeroVironment, Raytheon and the Future of Drones

Drones and drone defense systems will soon become two of the defense industry’s most profitable products, notes international expert Jim Powell, editor of Global Changes & Opportunities Report.

The attack on the Saudi oil installations at Abqaiq was done largely with approximately 25 armed drones. Their ability to elude sophisticated anti-air defenses and complete their mission greatly expanded the role of drones in warfare. We can expect to see much greater use of military drones from now on.

More from Jim Powell: Waste: An All-Weather Industry

AeroVironment (AVAV) is not the only US drone manufacturer. However, it is the closest to being a pure-play for investors. The company is the Pentagon's top supplier of battle-tested small drones — including the Raven, Wasp, Hawk, and Puma models.

The company also signed an agreement with Lockheed Martin (LMT) to develop their Global Observer that will provide around-the-clock airborne observation service.

AVAV is also developing several drones with electric motors powered by batteries that are recharged in flight by solar power. These long-endurance, high altitude aircraft will greatly increase the role of drones in military applications.

We are double dippers with AeroVironment. I first recommended the company in 2011 when it was $31.46. The stock has had its ups and downs since then but has gained 94%. I think more profits are on the way for this pioneering drone company with products that are proving their value.

Meanwhile, the attack on the Abqaiq oil facility showed that conventional air defense systems aren’t effective against drones – especially when they are used in a swarming attack.

The multi-million dollar Patriot Missile batteries and other anti-aircraft technologies made by Raytheon (RTN) are designed to destroy high-speed missiles that show up well on radar. The defense systems in use today can’t detect small, slow-moving drones that come in at tree-top levels.

Nearly every potential target will need drone defenses — and quickly. That list will include high-value civilian as well as military facilities. The market for the systems will surely total many billions of dollars and take years to fulfill.

See also: Seattle Genetics: Exciting Trials in Oncology

Although the sophisticated air defense systems made primarily by Raytheon didn’t stop the drones used in the Saudi attack, the company has the air defense experience to create systems that will.

Raytheon’s engineers are almost certainly working on the problem already. It would not surprise me if the first drone defenses become available within a few months.

Raytheon also looks attractive because it is merging with United Technologies (UTX) that makes many aerospace engines and systems. Not every analyst is in favor of the merger. However, I think acquiring the defense systems made by UTX will benefit Raytheon because it will expand the company’s product line and leave it second in its industry behind Boeing (BA).

We have done well with Raytheon. I first recommended the stock in April 2008 when it was $65.66. Although the stock has gains some 198%, I think the company will continue to perform well for us.

More From MoneyShow.com: