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Brighter Skies Await AeroVironment in 2019

Dan Caplinger, The Motley Fool

For years, drone aficionados have expected AeroVironment (NASDAQ: AVAV) to capitalize on the potential of the unmanned aerial vehicle industry. Yet time after time, the company has failed to move beyond its initial efforts to take command of the UAV niche, letting competitors slowly catch up and start to challenge AeroVironment's leadership position in the space.

Coming into Tuesday's fiscal third-quarter financial report, AeroVironment shareholders were looking for the company to return to profitability with solid revenue growth, but even they were surprised by the extent to which the drone maker turned things around. Now, with higher hopes for the full year, AeroVironment looks like it's gotten back some of its former glory.

Multiple unmanned aerial vehicles flying in a sky with ground-based control centers shown.

Image source: AeroVironment.

How AeroVironment regained altitude

AeroVironment's fiscal third-quarter numbers restored confidence in the company's long-term promise. Sales picked up 38% to $75.3 million, accelerating from its gains in the previous quarter and just about matching the consensus forecast among those following the stock. Income of $8.3 million reversed a year-earlier loss, and earnings of $0.35 per share came in far above the $0.14 per share that investors had been looking to see.

Solid gains came from both sides of AeroVironment's business. Contract services revenue was higher by more than two-thirds during the period, adding more than $10 million to the company's overall sales growth. However, product sales were healthy as well, posting a 27% gain from year-ago levels. Moreover, reduced costs of making those products led to a huge expansion in gross margin, climbing almost seven percentage points to finish above the 40% mark.

AeroVironment also reported good backlog numbers. The figure of $132.5 million in remaining obligations under firm orders in customer contracts was lower than it was three months ago, but it was almost $20 million higher than it was at this time last year.

CEO Wahid Nawabi put the quarter into a longer-term perspective. "We continue to make strong progress against our financial and operational objectives," Nawabi said, "and have established a strong foundation for fiscal 2020."

How will AeroVironment keep growing?

AeroVironment expects to find growth from multiple avenues. One is its HAPSMobile joint venture, in which it recently exercised a one-time option to boost its ownership stake from 5% to 10%. In Nawabi's words, "AeroVironment has a strong track record of transforming high-potential innovations and technologies into significant value, and we are excited about realizing the full potential of HAPSMobile and our other growth initiatives."

AeroVironment is confident enough in its future performance that it once again boosted its guidance for fiscal 2019. The company still believes that revenue should come in between $300 million and $310 million, but it now expects much higher earnings than it did previously. The new guidance for between $1.60 and $1.80 per share is $0.30 higher than the previous forecast, although it's worth noting that $0.26 per share of that amount comes from a one-time gain from a litigation settlement.

Helping to buoy enthusiasm about AeroVironment are recent reports about the potential size of the drone market. Industry analysts now believe the market for drones could reach $100 billion by next year, with roughly 70% of that coming from the defense industry. With substantial ties to government agencies, AeroVironment should be in prime position to get its share of defense contracts calling for drones with military or other applications.

Shareholders in AeroVironment were happy with the news, and the stock climbed more than 5% in after-hours trading following the announcement. The company will have to do more to prove that it can fully capitalize on the drone opportunity, but it looks like AeroVironment is finally starting to execute more effectively.

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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool recommends AeroVironment. The Motley Fool has a disclosure policy.