AeroVironment Secures $990M Army Contract Boosting Revenue Growth

AeroVironment, a military drone manufacturer, has won a $990 million U.S. Army contract, potentially increasing revenue growth and profit margins significantly over the coming years. However, concerns about high earnings multiples and free cash flow persist.

Date: 08-09-2024

AI Rating: 7

AeroVironment (NASDAQ: AVAV) has recently achieved a landmark win with a $990 million defense contract from the U.S. Army, which is poised to significantly affect its financial outlook. This contract is particularly noteworthy as it's one of the largest in the company’s history, more than doubling its revenues from 2022 and 2023 combined and exceeding fiscal 2024 revenue projections by 38%.

The contract will enhance AeroVironment's revenue growth by an estimated additional $198 million per year, translating into a projected 28% year-over-year increase in revenue. This growth rate is nearly double the 16% that Wall Street analysts anticipated, marking a strong performance in the defense sector.

In terms of profitability, AeroVironment's current net profit margin stands at 8%, which means the contract could potentially contribute around $0.59 in profit per diluted share annually. This increase is significant, especially considering the company made only $2.18 per share last year. Should AeroVironment scale production efficiently, this could lead to more substantial profits per share over time.

However, several challenges remain. AeroVironment is currently facing high valuation metrics; with a share price around $192, it is trading at about 88 times trailing earnings. Even with the addition of the new contract revenue and profit, valuations would still be high—a potential 60 times earnings even at an optimistic growth scenario of additional $1 per share in earnings.

Moreover, AeroVironment has been dealing with negative free cash flow for the past three years, raising concerns about its overall financial health. Although analysts expect the company to turn free cash flow positive by 2025, the timeline for significant cash generation (near $100 million) may take until 2026, making current valuations hard to justify based on anticipated growth alone.

In conclusion, while the $990 million contract represents a pivotal moment for AeroVironment and could significantly drive revenue and profits, the stock remains a challenging buy due to its high valuation and persistent cash flow issues. Investors should carefully weigh these factors when considering AeroVironment's stock.

Stocks: AVAV