Analysts following AeroVironment ($631 million market cap) find that it is full of surprises. When the company reported its Q2 2014 numbers, revenues were down 19% year over year, but the news wasn’t nearly as bad as the 33% plunge in revenues that investment banker Sterne Agee had predicted.
What’s more, the company’s UAS business, which was supposed to be the source of all its problems, showed a revenue decline of only 14%.It gets an investor to wondering: If Sterne could be so wrong about AeroVironment’s revenues, what else might it be getting wrong?
Where have all the UAS gone?
In the course of making its Q2 prediction, Sterne laid out some of the reasons for its pessimism:
[T]he need for building on the inventory of Ravens is limited. ~19,000 Ravens have been built over the last decade and current estimates assume ~5,000 in inventory. The Raven is designed to operate for 200 takeoffs and landings, but in war time this can be reduced by over two thirds, with many Ravens lost due to lost data links.
So by Sterne’s calculations, about 74% of the UAS that AeroVironment built over the past decade are now kaput. Dead to the world. And with combat operations in Afghanistan winding down, the analyst worried there’d be no need to replace them — hence weak sales and weak revenues at AeroVironment for the foreseeable future. But is that really the case?
UAS maths
Curious to find out, I reached out to AeroVironment investor relations head Steve Gitlin for some answers. What he told me, in a nutshell, is this:
- Over its history, the company has produced “more than 22,000 small unmanned aircraft.”
- 6,540 of these UAS were still in the Pentagon fleet as of July 1, 2011.
- AeroVironment continued selling (an unspecified number of) UAS to the Pentagon after July 1, 2011, contributing to the “22,000” total.
- Also included in this “22,000” total are UAS that went to the company’s 25 customers who are U.S.-allied nations.
To figure out how many of AeroVironment’s UAS remain in service today, we need to know two things. First, how many has it sold to the Pentagon since the Pentagon did its UAS inventory in July 2011? Second, how many UAS has AeroVironment sold to allied nations? With these answers in hand, we should be able to calculate how many of the original 22,000 UAS built remain in service today.
Fuzzy UAS maths
Unfortunately, AeroVironment hasn’t released this information publicly, and it wouldn’t be fair to other investors for the company to give the answers to me privately — but we can at least make some educated guesses on our own.
Regarding Pentagon sales, we know that 22,000 aircraft were sold over 10 years. So let’s assume 20% of those were sold over the last two years (i.e., since July 2011). We can’t be sure this number is precisely correct, but it seems a reasonable estimate. If it’s right, it works out to 4,400 aircraft, more than we knew about when the Pentagon last took inventory of the things.
As far as sales to foreign countries go, over the past 10 years, AeroVironment’s 10-K filings show that about 18.25% of all revenues went to overseas customers. Of course, these sales include both UAS, and also sales from the company’s battery charging division. So again, we’re guessing as to the precise proportion of UAS sales to overseas customers. Still, let’s assume that 18.25% of AV’s 22,000 UAS went overseas, and see what happens.
Voila! 4,015 presumed-dead aircraft come back to life.
Foolish takeaway
Add these two numbers to the 6,540 UAS that we know were still operational and in Pentagon service as of July 1, 2011, we come to the final result: Of the 22,000 UAS AeroVironment has built over its lifetime, as many as 14,955 may still be alive and kicking.
Now, inquiring minds can still differ on what this number means. If you’re an AeroVironment “bear”, you can reason that since Sterne Agee thought 5,000 UAS was too many, and the Pentagon won’t need to buy any more, then 15,000 UAS is way, way too many. This would imply a major headwind to AeroVironment making any more sales. It might even presage a UAS liquidation sale, such as we’re already seeing happen with U.S. MRAPs in Afghanistan.
On the other hand, AeroVironment “bulls” will argue that the military made a huge investment in buying 15,000 UAS. And since AV’s UASare upgradable (for instance, the Raven fleet has gone through four rounds of upgrades already, most recently with the installation of gimbaled sensor payloads), maybe the Army will just keep its AeroVironment UAS, upgrade them as needed, and never buy from anyone else.
Source: The Motley Fool
Ummm, this analyst isn’t much of an analyst if he is ignoring the potential commercial UAS market.
I believe that AVAV will be split in two divisions, the UAS and the Vehicle Charging Divisions and then the UAS Division will probably be acquired by either Boeing or Northrop Grumman. Lately, it seems like everyone is talking about UAS and AVAV will definitely benefit from this. In any case, I see AVAV climb to $60/$70 by year’s end.
This is a very incompete analysis:
(1) Most of the foreign customers are also using (UP) Ravens and other UAS in Afghnistan and other war theaters. So that inventory of active UAS is low.
(2) The military is sold on SUAS such as Raven and will maintian a warfighter stock level even if the combat trails off.
(3) Many CONUS Army units are well below the new stockpile levels, and will need further procurement. National Guard units are even less supplied.
(4) The technology contiues to progress and the inventory will be upgraded as budgets allow. The older less capable systems will be surplused to the police, DEA, etc as the FAA finally allows non-military usage.
So Aerovironemnt will still do OK, but not to the very high growth rates of the past.