In the shadow of the raging Ukraine conflict, some businesses found an unexpected tailwind. AeroVironment (US:AVAV), a leading innovator in unmanned aircraft systems and tactical missile systems, reported a substantial boost in its fourth quarter earnings.
The company reported adjusted earnings per share of 99 cents, beating analyst consensus expectations of 95 cents a share. The Q4 revenues surged by 40% year-over-year, reaching $186 million, beating consensus estimates of $159.5 million.
A record full fiscal year and Q4 revenue of $540.5 million and $186.0 million, respectively up 21% and 40% over the prior period, marked the company's best year ever. For perspective the Street was forecasting a figure of $159.5 million for sales.
The chart below from Fintel’s Earnings page for AVAV shows the underperformance in previous quarters leading up to the result this financial year.
The war seemingly bolstered the performance of AeroVironment's systems, setting the stage for another strong growth year in fiscal 2024. For FY24, the management is projecting revenues between $630 million and $660 million, while the adjusted earnings per share are expected to land between $2.30 and $2.60.
Veiling Reference
The company's chairman, president, and chief executive officer, Wahid Nawabi, attributed the strong finish to the fiscal year 2023 to its record-setting revenue and backlog, and "global tailwinds supporting our broad portfolio of robotic solutions," a veiled reference to the ongoing war in Ukraine.
These superior results were driven by strong ongoing order strength and significantly higher visibility since the global focus on military national defense has skyrocketed. While the group’s cash flow generation from operating activities remains below highs in 2021, it is bullish to see a return to positive cash flows in 2023 after a trough in 2022. The chart and table below from the financial metrics page for AVAV illustrates the cash flow performance in recent years.
AeroVironment's key growth drivers -- Tactical Missile Systems (TMS) and Small Unmanned Aircraft Systems (SUAS) -- both performed remarkably well in Q4, with TMS growing 110% year-over-year to $42.5 million and SUAS showing a solid 60% growth to $95 million, primarily fueled by international demand for Puma Systems.
To be sure, the ongoing conflict in Ukraine played a pivotal role in the increased demand for AeroVironment’s products. Approximately 40% of SUAS shipments were linked to the conflict, driving increased revenues and drawing attention to the vital role of the company's products in international defense scenarios.
The company took a ~$190 million charge related to a write-down in its MUAS segment, as a result of its elimination from the FTUAS competition. Despite this setback, the robust FY24 guidance should bolster confidence in the upside of the TMS and SUAS segments.
Beyond the scope of Ukraine, AeroVironment’s products are gaining momentum on a global scale. The kamikaze-drone Switchblade system has now been approved for export to around 50 countries, improving the outlook.
While the ongoing conflict in Ukraine is a considerable factor in the company's recent growth, the broader picture shows an expandingglobal marketfor AeroVironment's defense solutions. The company's small UAS products are increasingly seen as cost-effective alternatives to larger unmanned vehicles.
Additionally, AeroVironment's international sales have doubled since 2017, with its products being sold in 50 international countries, making up about 45% of total sales.
Jefferies Bullish on AI Prospects
Earlier this month, Jefferies analyst Sheila Kahyaoglu initiated coverage on AVAV stock with a ‘buy’ call and bullish $115 12-month target price, at the time suggesting the stock had at least 20% upside potential over the next year.
Kahyaoglu thinks AVAV is in a unique market position with their portfolio of unmanned solutions and ground unmanned aerial systems and ground units that is being advanced further with artificial intelligence (AI) and machine learning (ML) developments.
Fintel’s consensus target price of $109.82 shows that other analysts in the market are also bullish on the name, albeit to a lesser extent.
Other Beneficiaries
AeroVironment is not the only company riding the tailwinds of the Ukraine conflict. Other U.S. aerospace and defense companies also experienced significant jumps in their stock prices. The iShares U.S. Aerospace & Defense ETF (US:ITA), which holds more than 30 stock, including AVAV, has increased around 10% in value since Russian troops invaded Ukraine.
The conflict indirectly spurred this growth, as analysts predict that global defense spending budgets will rise in response to the escalating tensions in Eastern Europe, leading to a surge in defense stocks.
Several Western allies, including Germany and Japan, are already planning defense budget increases, which is expected to further boost defense stocks. Analysts predict that the ongoing conflict will encourage more spending, lifting the valuations of prime contractors.
According to Chris Senyek of Wolfe Research, many countries, both inside and outside of NATO, are expected to fortify their military capabilities and increase defense budgets on a secular basis due to the high geopolitical tensions.
It's not just AeroVironment reaping the benefits of the Ukraine-Russia conflict. Other defense stocks are also worth watching in this scenario. Northrop Grumman (US:NOC), Raytheon Technologies (US:RTX), Lockheed Martin (US:LMT), General Dynamics (US:GD), and Huntington Ingalls Industries (US:HII) are all positioned to benefit from the surge in defense spending due to the ongoing global tension.
This story originally appeared on Fintel.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
