Tuesday, April 7, 2020

An AIM Equity holding: AeroVironment (AVAV, $58.12): “Should Fly as High as Their Drones” by Jimmy O’Brien, AIM Student at Marquette University

AeroVironment (AVAV, $58.12): “Should Fly as High as Their Drones”
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.

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