By:
Jimmy O’Brien, AIM Student at Marquette University
Disclosure:
The AIM Equity Fund currently holds this position. This article was written by
myself, and it expresses my own opinions. I am not receiving compensation for
it and I have no business relationship with any company whose stock is
mentioned in this article.
Summary
• AeroVironment (NASDAQ:AVAV) is global leader in technology driven
solutions that designs, develops and manufactures technologically advanced
unmanned aircraft systems.
• AVAV earnings for 3Q fiscal
year 2020, driven by -18% year-over-year change in revenue and -23% gross profit.
Despite this, the company still expects to have growth for the full fiscal year
from the outperformance of Q1 and Q2.
• Guidance increased after
the outbreak of COVID-19 shows confidence the pandemic will not affect their
financials.
• Expecting to earn three
year army LMAMS contract worth up to $160 million, which is the largest for their
TMS business. Furthermore, AVAV is growing their international business with three
allied nations securing an $18 million contract for UAS.
• Given their continuing
contract negotiations, progress in their HAPS mobile joint venture with
Softbank, and increased government defense spending, I recommend the AIM Small
Cap Equity Fund HOLD the position in AVAV.
Key
points:
AeroVironment is still in
a strong position for growth, despite the economic impact of COVID-19. Operating
most of their supply chain in the US and government defense budget growing in
the UAM market the pandemic will have a limited effect on their financials.
One interesting
development for AVAV, is their HAPS joint venture with Softbank. Currently, they
have just announced another round of flight testing, as well as the unveiling
of HAPS Alliance. This alliance was formed to promote the growth of this technological
advancement for 5G networks in rural areas through their stratosphere flying drone.
Companies involved in this alliance are Airbus, China Telecom, Deutsche
Telekom, and other leaders in aerospace, telecom, and technology.
Furthermore, government
funding is healthy with a proposed government fiscal year 2021 procurement budget
of $112 million. This will allow AVAV to continue growth, as they dominate the
UAS market. The three year $160 million army LMAS contract that is being negotiated
will likely be finalized in Q4, or early fiscal year 2021. As this is their
largest LMAS contract, it should reflect positively on the stock price going
forward if it comes to fruition.
AVAV was added to the AIM
Small Cap Equity Portfolio in February of 2020. As the thesis has yet to play
out, there is still a lot of room for it to reach the price target of $81.61 as
they continue to grow.
What
has the stock done lately?
Despite
managements optimism toward their performance through the pandemic, the stock
has still experienced extreme volatility. In early March, along with the major
sell for the entire market, AVAV decreased 30%. Since that time they have
bounced back returning 18% from the low. As the markets remain volatile, it will
be an extended recovery and could delay AVAV reaching their price target.
Past
Year Performance:
AVAV has returned -8.21%
over the last year. Prior to the market sell off the company was trading close
to $80.00, but had experienced volatility throughout this period. As the government
contracts tend to take time in the negotiation process, AVAV prices fluctuate from
the delayed closing of deals.
1
Year Stock Chart vs. Benchmark
Source:
FactSet
My
Takeaway
Given the current market
situation, AVAV has some resilience to the COVID-19 pandemic and should continue
their current growth trajectory. With new contracts being negotiated, progress
in their HAPS mobile joint venture, and abundant US defense funding in their
market, AVAV has a lot of positives moving into the end of their 2020 fiscal
year. The thesis for this stock has not had enough time to come to fruition, so
I recommend the AIM Small Cap Fund hold the position in AVAV.
1
Month Stock Chart
Source:
FactSet
