Earnings Review - Week of 03/12/2021

Deuteronomy Chapter 7 verse 9 states, "Know therefore that the Lord your God is God; he is the faithful God, keeping his covenant of love to a thousand generations of those who love him and keep his commandments."

This verse is very helpful in promoting the fact that God is the center of equality. Through His word, it is clear that every generation that has and ever will live on the earth has access to God's love. And why shouldn't we all - we are all created in God's image. The key words of this verse are God is God, meaning there is no other God; he is the faithful God meaning he never fails; and lastly, He keeps his covenant of those who love Him and keep his commandments, meaning we all have a choice to accept and follow God.

Just as I have a choice to decide whether or not I will follow God, I have a choice as to how I will manage my investments. The special circumstances of COVID last year have had a profound impact on the global economy and public companies. This has created a challenging path forward, where being selective and consistently scrutinizing performance in 2021 will be key.

This week's earnings review only includes Aerovironment, Inc.


Key Points

Aerovironment, Inc. (AVAV) has had a very strong Fiscal Year 2021 through Q3 as the company delivered year-over-year increases in revenue, gross margin, diluted earnings per share and Non-GAAP diluted earnings per share in the third quarter, despite the ongoing challenges presented by the COVID-19 pandemic.

Aerovironment has made three transformative acquisitions that the company feels will accelerate success and value creation.

  • The acquisition of Arcturus UAV extends the company's reach and expands its solutions portfolio with medium UAS, which addresses a more than $1 billion segment of the UAS market.

  • The pending acquisition of Telerob will add a suite of unmanned ground vehicles to Aerovironment's portfolio, expanding its offering to the ground domain for defense and non-defense customers, such as law enforcement and first responders.

  • Through the acquisition of Progeny Systems Corporation’s Intelligent Systems Group, AeroVironment’s development and deployment of critical technologies will be accelerated, such as artificial intelligence and perceptive autonomy, which will help customers operate more effectively in contested airspace against peer and near-peer adversaries and increase customer-funded research and development revenue.

These deals will impact the company's capital structure, driven primarily by the Arcturus deal. Aerovironment has received commitments for a $200 million Term Loan Facility and $100 million revolver (undrawn), and expects to fund approximately $155 million of the acquisition from cash on hand. This means the company will have debt of $200 million and cash and equivalents of $229 million with the company still maintaining a modest $30 Net Cash position. In the event the revolver is used, this could switch to a Net Debt position, although it should remain modest as well.

Aerovironment considers many competitors both large and small for its various Revenue segments including UAS, TMS, HAPS, and Other. Of these the smallest peers include Elbit Systems (ESLT) and FLIR Systems (FLIR). Aerovironment trades at a strong premium for its EV/Revenue multiple, but is only slightly higher for its SP to OCF per share multiple. However, both Elbit and FLIR have Net Debt levels much higher than what Aerovironemnt will incur, and are only anticipating Revenue growth over the next couple of years from 2.5% to 5.5%, with lower OCF margins.

Aerovironment is anticipated to grow nearly 25% per year from Fiscal Year 2020 towards $570 million. While the OCF margin is not easily estimated, the low debt level and mid-term growth potential easily affords the company justified multiple levels. If Aerovironment can sustain mid-term Revenue growth around the 12-15% level, with OCF margin at 15-20%, the company is poised to remain a solid investment. However, at today's SP at $121, I don't see a lot of upside potential for the remainder of the year and investors should expect an annualized return of around 10% over the mid-term.

I am modeling Aerovironment with a PT near $140 per share over the next 18-month period. This assumes 6 times EV/Revenue and 40 times OCF per share, including Revenue approaching $635 million for Fiscal Year 2023. I have a cost basis at nearly $73 per share and will look to only accumulate to a maximum cost basis of $85 per share. This is predicated on my expectation to achieve an annualized return of at least 20% for the position over the mid-term.

With market volatility intensifying, I am looking for a lower opportunity to average the position, possibly below $100 per share. The other thing that will be important will be the Q4 report where management will provide updated guidance on expectations. Initial anticipation is for increased Revenue growth and potential expansion of OCF margin.

Financial Metrics on a Last Twelve-Month, LTM, Basis

  • Net Cash Position: $384 million

  • Revenues: $394 million

  • Gross Margin, GM: 40%

  • Operating Cash Flow, OCF / Margin: $89 million / 22.5%

  • Free Cash Flow, FCF / Margin: $77 million / 19.5%

  • Shares Outstanding: 25 million

  • Small Unmanned Aircraft Systems (UAS) Rev: $228 million

  • Tactical Missile Systems (TMS) Rev: $90 million

  • High Altitude Pseudo-Satellite (HAPS) System Rev: $59 million

  • Other Rev: $17 million

  • U.S. Government Rev: $270 million

  • Non-U.S. Government Rev: $124 million

Valuation Metrics

  • Enterprise Value, EV: $2.6 billion

  • EV/Revenues: 6.7 times

  • Net Debt/OCF: N/A

  • Stock Price, SP/OCF per Share: 34 times

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