AEROVIRONMENT INC AVAV
May 11, 2013 - 4:29am EST by
heathland
2013 2014
Price: 19.88 EPS $1.29 $0.39
Shares Out. (in M): 22 P/E 15x 51x
Market Cap (in $M): 446 P/FCF 103.1x 20.9x
Net Debt (in $M): 0 EBIT 52 17
TEV ($): 312 TEV/EBIT 6.0x 18.0x

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  • Government contractor
  • Contract Wins
  • Long term contracts
 

Description

Company Description

AVAV designs, develops, manufacturers, and operates small Unmanned Aircraft Vehicles (UAVs) for the U.S. Department of Defense and other allied military forces. Ground units utilize the electric-powered, hand-launched UAVs for situational awareness, providing the war fighter with real-time video imagery for “over the hill” and “around the corner” reconnaissance.   The U.S. army accounts for 85% of procurement and has more than 1,700 4.8-pound Ravens systems in its inventory, which consists of a controller, spare parts, and three UAVs, with a goal of acquiring 2,300 systems by 2017. The Raven costs $35,000 each and $250,000 for a whole system. The Company also produces a more rugged 13-pound Puma UAV, costing $400,000 per system, and the smaller 2.85 pound Wasp system as a back packable solution for Combat Controllers on the ground. 

In its development pipeline, the Company is in advanced stages of producing the Switchblade. The Lethal Miniature Aerial Munition System (LMAMS) is a back packable, tube-launched, battery-powered drone that carries a small warhead and sends back live streaming video. The operator can designate a target using GPS precision and the drone detonates on the target with minimal collateral damage. The electric vehicle (EV) segment also produces industrial EV charging systems for commercial fleets as well as EV home chargers for the individual consumer.

Catalysts

  • State Department UAV Support Services contract – this contract is worth up to $1bn over 5 years. The State Department seeks to acquire a fleet of unmanned aerial vehicles to protect diplomats in Iraq and other high-risk countries. The contractor will deliver the drones through task orders and will provide pilots, analysts, navigators, and global logistics support.  AVAV submitted bid and demonstration for this contract at the end of 12’. As noted on the conference call, a contract award decision is expected any day.
  • Accelerated Switchblade adoption –The Switchblade has had field success in Afghanistan and the Army is advancing development of the product, and possibly implementing an operational needs order for troops in Afghanistan 
  • M&A - company is eventually takeout candidate
  • End of defense cuts
  • War / global unrest

Investment Thesis

  • Pure play small UAV producer with strong  industry long-term growth profile
  • Strong balance sheet - $11.50 per share in cash, cash equivalents, and WC
  • Acquisition target – trades at .97 EV/S, in line with large defense companies; the large defense contractors may increase capital deployment for bolt-on acquisitions to capture incremental growth in a no/slow growth defense environment – Goldman projects 30-50% likelihood of M&A activity
  • Attractive upside/downside
  • Upside Price Target - $61.33, up 240%
  • Downside Price Target - $16.10, down 15%

Q313’ Earnings Miss

  • EPS - reported EPS for quarter of $.17 versus $.26 in last year’s corresponding quarter. This badly missed consensus EPS estimates of $.37, surprising analysts with 70% earnings shortfall. 
  • Revenue – sales in quarter $47.1M vs. $72M last year. This fell 30% short of consensus revenue estimates of $89.02M.
  • Causality: as of the Q313’ CC on March 5th, it was 438 days since government fiscal ’12 defense budget was approved. By comparison, the longest time to complete an Army Raven contract in prior 4 years was 161 days – this uncertainty is creating large order disruption in short-cycle Defense companies like AVAV, where orders can be placed and fulfilled within the same quarter, leading to large lumpiness in earnings numbers
  • Company response – CEO Tim Conver: “We believe these are delays in order timing, and not lost orders”.  In its remaining outlook for FY13’, the company anticipates no incremental orders from Government Fiscal Year (GFY) 12’ and lengthened its order cycle expectations moving forward. In addition, the Company is working closer with customers to determine contract timing.
  • Market reaction – AVAV shares fell 10% after the earnings release, and analysts lost confidence in management execution after such a big earnings miss

Positives

  • Share price very limited correlation with stock market
  • Insider buying – Arnold Fishman, AVAV director since 1998, just purchased $435,000 of common stock with personal funds over past 10 days, increasing Mr. Fishman's  cumulative shares owned by 10.5%
  • Increased international sales – sales to international customers as of Q313’ surpassed total orders from FY12’

Negatives

  • Sequestration budget delays causing uncertain revenue & EPS visibility
  • Book-to-bill ratio last quarter fell to .58x, indicating sequestration and decline in defense spending limiting new order flow
  • DoD defense cuts - withdrawal from Afghanistan, reduction in force – the GFY14’ budget cuts Army expenditures by 4%, Raven acquisition targets flat YOY through 2017
  • Delayed EV adoption – electric vehicles sales slower than expected, like in Nissan Leaf and Chevy Volt – recent sales numbers suggest pickup in EV units

Upside Target

  • Analyst consensus EPS estimates – FY 2014 – $.63
  • Extreme stand-alone peak target - $61.33 – based on triangulation of valuation measures (see note 1 below)
  • M&A price target - $41.04 – based on average Global Defense M&A multiples from Jan 2006-present, see note 2 below

Downside Target

  • Low price target – $16.10 – can fall to this level if sequestration forces order cuts instead of current sequestration impact of order delays
  • Replacement cost – at least $11.50 per share in liquid assets – the IP portfolio adds value as well - netting out the entire inventory and liabilities leaves $200M in very high quality assets consisting of cash, cash equivalents (mostly municipal bonds), and AR. Adding back inventory, highly liquid assets total $263M. The current market cap is ~$400M.
  •  Risk Factors

Short term

  • Sequestration:  spending cuts may cause cancellation of previous orders, leading to excess inventory and perhaps write-offs
  • Cash conversion cycle: the trend of rising DSOs and DSIs will likely continue over the next months as Congress debates defense spending budgetary issues.

Long term

  • Industry competition – Chinese manufacturers developed the ASN-15, a small UAV with similar characteristics as AVAV’s RQ-11 Raven, Chinese UAVs also cheaper than U.S. counterparts and will compete for international orders
  • Industry growth from commercial applications inhibited by FAA regulation of UAVs into National Airspace – small UAVs below 55 pounds projected timeline by 2014 but actual implementation may extend into 2015

Exhibit 1 – Valuation Measures

 

Valuation   Method 1 - Revenue Stream

 

Curr   EV/T12M Sales

PPS   Target

High

2.84

$56.29

Low

0.91

$18.02

Average

1.70

$33.69

Current

0.91

$18.02

     

Valuation   Method 2 - P/CF

 

High

71.26

$61.44

Low

11.99

$10.34

Average

24.96

$21.52

Current

20.90

$18.02

     

Valuation   Method 3 - Curr EV/T12M EBITDA

High

27.35

$84.69

Low

5.82

$18.02

Average

11.96

$37.05

Current

5.82

$18.02

     

Valuation Method 4 - Normalized Earnings

Assuming mid-range management guidance FY2013 $.40

 

P/E   TTM Multiple

PPS   Target

High

33.00

$42.90

Low

13.86

$18.02

Average

26.89

$34.96

Current

13.86

$18.02

     
 

Average   Price Targets

 

PPS   Target

Gain/Loss

High

$                    61.33

240%

Low

$                    16.10

-11%

Average

$                    31.80

76%

Current

$                    18.02

 

 

Note 2 – M&A Valuation

 

Valuation Method 5 - M&A Valuations

 

Global   Defense M&A summary (January 2006-present)

EV/S(prior   year)

EV/EBITDA

 

1.8

 

15

 
       

Based   on most recent data, the PPS target for each metric is as follows:

EV/S

35.64

   

EV/EBITDA

$46.44

   

Avg   Price

$41.04

   
I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

  • State Department UAV Support Services contract – this contract is worth up to $1bn over 5 years. The State Department seeks to acquire a fleet of unmanned aerial vehicles to protect diplomats in Iraq and other high-risk countries. The contractor will deliver the drones through task orders and will provide pilots, analysts, navigators, and global logistics support.  AVAV submitted bid and demonstration for this contract at the end of 12’. As noted on the conference call, a contract award decision is expected any day.
  • Accelerated Switchblade adoption –The Switchblade has had field success in Afghanistan and the Army is advancing development of the product, and possibly implementing an operational needs order for troops in Afghanistan
  • M&A - company is eventually takeout candidate
  • End of defense cuts
  • War / global unrest
    sort by    

    Description

    Company Description

    AVAV designs, develops, manufacturers, and operates small Unmanned Aircraft Vehicles (UAVs) for the U.S. Department of Defense and other allied military forces. Ground units utilize the electric-powered, hand-launched UAVs for situational awareness, providing the war fighter with real-time video imagery for “over the hill” and “around the corner” reconnaissance.   The U.S. army accounts for 85% of procurement and has more than 1,700 4.8-pound Ravens systems in its inventory, which consists of a controller, spare parts, and three UAVs, with a goal of acquiring 2,300 systems by 2017. The Raven costs $35,000 each and $250,000 for a whole system. The Company also produces a more rugged 13-pound Puma UAV, costing $400,000 per system, and the smaller 2.85 pound Wasp system as a back packable solution for Combat Controllers on the ground. 

    In its development pipeline, the Company is in advanced stages of producing the Switchblade. The Lethal Miniature Aerial Munition System (LMAMS) is a back packable, tube-launched, battery-powered drone that carries a small warhead and sends back live streaming video. The operator can designate a target using GPS precision and the drone detonates on the target with minimal collateral damage. The electric vehicle (EV) segment also produces industrial EV charging systems for commercial fleets as well as EV home chargers for the individual consumer.

    Catalysts

    Investment Thesis

    Q313’ Earnings Miss

    Positives

    Negatives

    Upside Target

    Downside Target

    Short term

    Long term

    Exhibit 1 – Valuation Measures

     

    Valuation   Method 1 - Revenue Stream

     

    Curr   EV/T12M Sales

    PPS   Target

    High

    2.84

    $56.29

    Low

    0.91

    $18.02

    Average

    1.70

    $33.69

    Current

    0.91

    $18.02

         

    Valuation   Method 2 - P/CF

     

    High

    71.26

    $61.44

    Low

    11.99

    $10.34

    Average

    24.96

    $21.52

    Current

    20.90

    $18.02

         

    Valuation   Method 3 - Curr EV/T12M EBITDA

    High

    27.35

    $84.69

    Low

    5.82

    $18.02

    Average

    11.96

    $37.05

    Current

    5.82

    $18.02

         

    Valuation Method 4 - Normalized Earnings

    Assuming mid-range management guidance FY2013 $.40

     

    P/E   TTM Multiple

    PPS   Target

    High

    33.00

    $42.90

    Low

    13.86

    $18.02

    Average

    26.89

    $34.96

    Current

    13.86

    $18.02

         
     

    Average   Price Targets

     

    PPS   Target

    Gain/Loss

    High

    $                    61.33

    240%

    Low

    $                    16.10

    -11%

    Average

    $                    31.80

    76%

    Current

    $                    18.02

     

     

    Note 2 – M&A Valuation

     

    Valuation Method 5 - M&A Valuations

     

    Global   Defense M&A summary (January 2006-present)

    EV/S(prior   year)

    EV/EBITDA

     

    1.8

     

    15

     
           

    Based   on most recent data, the PPS target for each metric is as follows:

    EV/S

    35.64

       

    EV/EBITDA

    $46.44

       

    Avg   Price

    $41.04

       
    I do not hold a position of employment, directorship, or consultancy with the issuer.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

    Messages


    Subjectany questions?
    Entry05/11/2013 09:09 PM
    Memberheathland
    let me know if there is anything you are interested in asking about AVAV

    SubjectGoldman upgraded the defense industry this morning
    Entry05/30/2013 10:24 AM
    Memberheathland
    Let me know if you want to start dialogue on AVAV. 
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