AeroVironment Stock: An Expanded Multiple Buy (NASDAQ:AVAV)

AeroVironment (NASDAQ:AVAV) released its fourth quarter results on the 27th of June. I previously covered the US drone specialist and concluded that, as a defense company, AeroVironment stock trades ahead of typical defense valuations. This most likely is caused by the fact that General Atomics, which is the top drone maker, is a private company, and as a result, investors allow for a significant premium to have at least some exposure to the defense drone market.

In this report, I will be analyzing the most recent earnings, the FY 2024 guidance and provide a valuation on the stock.

AeroVironment Revenues And Results Jump

During the fourth quarter, AeroVironment saw its revenues jump by 40% to $186 million as the war in Ukraine accelerates demand for drone solutions. Full year revenue increased to $541 million from $446 million last year, representing 21% growth. About the revenues, there is not a lot to say other than they exceeded expectations as volumes were higher than anticipated.

Despite significantly lower margins in the services business due to accelerated depreciation, the overall margins were steady year-over-year, driven by strong volume for product sales coupled with strong margins. Total revenues for the year were $541 million, indicating a 21% growth in revenues and marking the sixth consecutive year of higher revenues. Adjusted EBITDA ended up being $90 million, representing a 43% increase year-on-year. So, we saw adjusted EBITDA growth higher than the topline growth, which is something I am liking as an investor.

On a net loss/profit basis, AeroVironment booked a $176 million loss for the year, which was driven by around $190 million in charges. $34.1 million was driven by an acceleration of intangible asset amortization, and the remaining $156 million of the non-cash charge was a goodwill adjustment from the revaluation of the Medium UAS as a result of the FTUAS Increment 2 loss. In a previous report, I already discussed this, and we can now check whether the sharp reduction in the company’s stock was justified. AeroVironment has around 26.2 million shares outstanding, meaning that to include the charge without any price multiple applied, the stock should have tanked around $6 per share and the actual reduction in share price following the news was almost $17. I wouldn’t say that the share price reduction was an overreaction as we don’t know to what extent the share price incorporated a FTUAS program win, but the share price drop was steeper than the charge recognized by the company on a per share basis.

AeroVironment Presents Strong Outlook For FY2024

More interesting than the results at this point is the guidance for FY2024 and the guidance is looking good with 19% expected growth in revenues at the midpoint and adjusted EBITDA growth in excess of revenue growth at 28% and core earnings per share growing by 94%. So, those are all very strong indicators, and from demand side, it definitely does seem that the support for higher revenues and profits is there.

What Is AeroVironment Stock Worth?

The major challenge when valuing AeroVironment stock is its stretched multiple as compared to the aerospace & defense industry. Perhaps comparing the AeroVironment stock to the industry median is not completely justified as the company is seeing consecutive years of revenue growth and there are not many suppliers that specialize in defense unmanned aerial systems. With an EBITDA projected of $120 million, AeroVironment stock would be worth $131 providing a 36% upside. The high end of Wall Street analyst price target is $130 with a median of $108 per share. If we were to average the industry and company-based price targets, we would end up with a $102 per share price target, providing around 6% upside. It’s not huge but still signals an upside. Either way, while the fundamentals have not changed much, a price target of $131 would be fitting the company’s expanded EV-to-EBITDA multiple. The change from Hold to Buy is not so much driven by changes in earnings estimates or balance sheet changes, but by the fact that we are no longer keeping the industry multiple as a baseline, which can be justified by the unique positioning of AeroVironment and the demand for unmanned aerial systems.

Conclusion: AeroVironment Stock Is A Buy If You Accept The Higher Multiple

The Q4 results were strong and also reflected the FTUAS Increment 2 loss, which can be considered as a reasonable non-cash de-risk. Moreover, the company provided a strong outlook for 2024 with earnings growth outpacing revenue growth.

While expectations have not drastically changed, I am marking the stock a buy as the expanded multiples that previously made the stock a Hold rather than a Buy in my book can be justified by the demand for UAS, the lack of UAS specialist stocks, and consecutive years of revenue growth.