Why I’m Buying the One Stock Whose Future is Now

Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Imagine a future where we no longer pull into a gas station to fill up our cars with a substance whose origin was beneath the feet of our enemy.  Instead we pull into fuel stations with a wide variety of choices that are cleaner, cheaper, and produced right here at home.  That’s of course when we actually need to fuel up from a long trip instead of from the ease of our own garage. 

While we’re in our little dream world, let’s imagine a future where our soldiers are not put in harm’s way to defend our interest in that substance that once filled our tank.  Instead they are safely protected, looking for the enemy over the ridgeline via a computer monitor as opposed to putting their life on the line gathering that same intel. 

Both of those futures are today’s reality thanks to AeroVironment (NASDAQ: AVAV).  The company is an industry leader in both Electric Vehicle Solutions and Unmanned Aircraft, both of which have the power to be high flyers over the coming decade.  That’s why I’m adding shares of this leading innovator to my virtual “No Drip, No Mess” portfolio. 

Electric Vehicle Solutions

With the emergence of electric cars such as General Motor’s (NYSE: GM) Chevy Volt or Tesla’s (NASDAQ: TSLA) Model S the lack of recharging infrastructure is something that AV is working to rectify.  To date they’ve deployed nearly 10,000 level two stations throughout North America.  That’s a start, but they’ve got a long way to go in order to be as convenient as there are more than 100,000 gas stations in America.  One example has them working with NRG (NYSE: NRG) on a comprehensive network of stations called eVgo to help further mainstream the adoption of electronic vehicles.  NGR is investing $150 million to build out this network of EV recharging stations. This utility is looking to increase electricity demand and AV has the solutions to make this a mainstream reality.

It’s hard to get more mainstream than to have their product available for retail sale at Amazon and the price point of less than a thousand dollars is not an obstacle for those who can afford to buy the cars.  However, one of the biggest road blocks that remains for electric vehicles to go mainstream is the price of the vehicles themselves.  Tesla’s Model S for example has a starting price of $57,400 while the Volt will set you back $39,145.  While EV tax credits can reduce the cost by about $7,000, it’s still not enough to entice most Americans that it’s worth the extra cost.  Therein lies both the opportunity and the obstacle for AeroVironment.  As the prices of EVs come down, it’ll drive more sales of their EV Solutions.

Unmanned Aircraft

As if trying to save the planet through their EV Solutions wasn't enough, AeroVironment has taken it a step further through their products that save the lives of our armed forces.  This segment is much larger than the EV Solutions at 84% of their revenue and they are the sole supplier to the DoD for these small UAS.  While large defense contractors like Northrop Grumman and their Global Hawk get a lot of the press and revenue.  The program costs $1.635 billion with each unit costing about $104 million.  Compare this to AV who had revenue of just $325 million last year. 

They have several products in their portfolio including the Raven, Wasp, and Puma as well as many big (Global Observer) and small (Nano) solutions under development.  They also offer the Qube for which can be used for a variety of non-military missions such as public safety, wildlife and environmental monitoring, infrastructure management and scientific research.  Their products are truly breakthrough and can save lives and time and represent just the tip of the iceberg in terms of the future capabilities of this innovative company.

Financial Snapshot

Shares of AeroVironment are surprisingly cheap at just 18 times earnings and 13.5 times cash flow.  The company is sitting on a net cash position of about 10% of their market cap with no debt.  If there is one rub against the company it’s the fact that sales have grown just 10% annually the past five years while earnings have been virtually stagnant.  Long term earnings are projected to grow at about 8% per year but that’s tied to the unknowns of a shrinking defense budget and their EV solutions business' ability to go mainstream.  Any upside surprise could send shares flying much higher.

The Trade:

If you read my article on the one defense contractor I was adding to the portfolio you’d already have a heads up that I was planning to use the cash from that options trade to invest in AeroVironment.  I’ll combine that cash with some more of the available cash that the portfolio has generated and earmark a 0.5% stake in AeroVironment.  Lately, that represents about 21 shares.  If the stock falls below $20 each I’d be ready to fill out to a full 1% “No Mess” position.

Risks and Why I’d Sell

I see two big risks to an investment in AeroVironmnet.  First, sequestration could end up becoming a reality and if we don’t get our spending under control the cuts could be even deeper in the future.  That could force our military to only spend to maintain what they currently have instead of investing in the innovative future solutions like those AV is developing.  Finally, their EV solutions are competing against cheap, clean, and abundant natural gas.  If nat gas as a transportation fuel goes mainstream, it could really pull the plug on the future of their EV business.

While both risks are real, I’m confident in AV’s ability to further innovate so that neither risk ever becomes a reality.  Add their innovative nature to the fact that the company is debt free, and trades at a very reasonable valuation and you have the makings of investing success.  I’m excited to add this innovative company to the portfolio as I believe it has the power to generate some high flying returns.

latimerburned owns shares of AeroVironment. The Motley Fool owns shares of Tesla Motors. Motley Fool newsletter services recommend AeroVironment, General Motors Company, and Tesla Motors . Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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