Despite Fears, Unmanned Aircraft Are the Future

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

Northrop Grumman's (NYSE: NOC) X-47B unmanned aircraft recently landed itself on an aircraft carrier, proving that totally autonomous air combat is on the way. While some may fear that this is the first step toward the robots taking over the Earth, investors should be eager to get aboard this industry-changing technology.

The Clear Leader

That Grumman was the lead government contractor on this project obviously puts it in the lead to develop the next round of drones. In fact, the X-47B Unmanned Combat Air System, which has been 10 years in the making, looks pretty close to being the first aircraft that you send into battle without the need for any human intervention.

This is huge because it would allow the United States to pare down its military without inherently losing air superiority. Moreover, it would reduce the time needed to get combat planes in the air because pilot training would be removed from the equation. As fast as Grumman can build them is as fast as they can get put to work.

Northrup Grumman is a large military contractor with notable products like the Global Hawk unmanned reconnaissance system, B-2 stealth bomber, F-35, and the Minuteman III Intercontinental Ballistic Missile. Overall, about 40% of its top-line comes from aerospace sales.

The company has been streamlining its operations in recent years to better serve America's changing military needs. The top-line has seen the impact of that, falling in each of the last three years. Bottom-line results, however, show the success of the effort, since earnings have been higher in each of the last four years. Profit margins going from around 7% to 12% explains the success.

Well positioned for the next steps in drone warfare, Northrup Grumman should interest growth and income investors. It's dividend yield of around 2.8% is notable and despite a solid run so far this year, the shares still trade at a reasonable price to earnings ratio of about 12.

Don't Forget the Birds

For more aggressive investors, however, relatively tiny AeroVironment (NASDAQ: AVAV) might be a more interesting option. Although it recently won another order from the U.S. Army for a hand launched reconnaissance drone weighing in at less than five pounds, its Hummingbird drone shows how far its technology has advanced.

The Hummingbird is aptly named since it is the size of a small bird. Like its namesake, it can hover, allowing it to provide real time video from hard to reach places. Although not ready for market, it could help change the face of urban combat.

AeroVironment has a market cap of around $450 million, absolutely tiny compared to Grumman's $20 billion market cap. That, though, just makes it a potential takeover candidate at some point down the line. Adding to that potential is the fact that the top and bottom lines fell notably in fiscal 2013, down 26% and 65% respectively. And, unlike Grumman, the stock is down for the year.

With a PE around 49, it's hardly cheap, so aggressive investors are the only ones who should be looking here. That said, with impressive technology and a downturn in its business, it's got turnaround potential even without a buyout offer.

The Big Kahuna

Boeing (NYSE: BA) is another company in the drone space that would fit well with investors unwilling to bet so heavily on military business. Around 40% of the company's business is tied to the military, with the rest coming from its dominant perch atop the commercial aircraft industry.

An uptick in commercial aircraft sales has been the driving force behind Boeing lately, despite continued problems with its newest high-tech offering. The company's results can be volatile because it sells large and expensive products, but over the last three years sales have increased from about $64 billion to over $80 billion, with earnings passing $5 a share in each of the last two years. And it has a backlog of work that should last years into the future.

Although trading near all-time highs, the PE is still just around 20. While not cheap, it isn't outlandish for a company in a recovering industry that also has such a clearly defined book of business. Growth investors should take a look. Add in the drone business, though, and the picture gets even better.

For example, Boeing's Phantom Eye high altitude drone is powered by liquid hydrogen and can fly for up to four days carrying 450 pounds, all while sending information back to its controllers. Imagine what the company could do when, not if, it starts to further integrate that type of military technology into commercial aircraft.

Frightening but True

While the idea of unmanned aircraft flying themselves is scary, it's clearly the science of today. Northrup Grumman appears to have the lead, which makes it a key play in the space. AeroVironment is another key drone maker, and a potential takeover target. Boeing, meanwhile, is a drone player and has the potential to quickly shift its technology into its surging commercial business.

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Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends AeroVironment. The Motley Fool owns shares of AeroVironment and Northrop Grumman. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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