Bouncing Backlog Gives AeroVironment Investors Hope for the Future

By Dan Caplinger Markets Fool.com

AeroVironment (NASDAQ: AVAV) has been a source of disappointment for many investors who had hoped that a thriving market for unmanned aerial aircraft would lead to dramatic growth for the drone specialist. Yet so far, hoped-for profits have not been forthcoming, and coming into Tuesday's fiscal third-quarter financial report, AeroVironment shareholders were bracing for net losses and another significant drop in sales. AeroVironment wasn't able to avoid that fate, but the results it posted weren't quite as bad as many had feared.

Continue Reading Below

Let's look more closely at AeroVironment to see how it did and whether better times lie ahead.

Image source: AeroVironment.

AeroVironment keeps sinking

AeroVironment's fiscal third-quarter numbers didn't look all that strong on their surface. Sales fell by more than a fifth to $53.2 million, but the figure was better than the consensus forecast for less than $51 million in revenue. Similarly, AeroVironment posted a net loss of $2.2 million, which worked out to about $0.09 per share. But that loss was much narrower than the $0.34 per share in red ink that most of those following the stock had expected to see.

Looking more closely at the report, AeroVironment continued to see a huge disparity between its two primary segments. The unmanned aircraft systems business continued to take big hits, with revenue and gross profit both falling by nearly a third. By contrast, the efficient energy segment saw sales jump by nearly three-quarters, and gross profit climbed by nearly half from year-ago levels. Still, the energy business is so much smaller than the drone business that success in energy couldn't lift overall results dramatically.

Continue Reading Below

A similar effect was visible in the product sales and contract services categories. The smaller contract segment posted gains of 15% that translated to improvement in gross profit of nearly a fifth. But product revenue dropped 31%, and gross profit for the segment was down close to 40% from the year-ago quarter.

Some of the bottom-line performance that AeroVironment showed came from disciplined cost control. Both overhead expenses and research and development costs fell during the quarter, showing a commitment to making the most of revenue under tough conditions. However, unfavorable income tax provisions widened losses from what they would otherwise have been.

The best news came on the backlog front. AeroVironment saw funded backlog jump to $128.2 million, which was almost double its level nine months ago and up slightly from the end of 2016.

CEO Wahid Nawabi was happy about the report. "Strong third quarter order flow produced our third highest funded backlog of $128 million, significantly increasing our full year visibility," Nawabi said, and the CEO pointed to a favorable mix of revenue and lower spending levels for the solid performance.

Can AeroVironment build momentum?

AeroVironment also has confidence looking ahead. In Nawabi's words, "Continued strength in the international small unmanned aircraft systems market, combined with progress in our tactical missile systems business, position AeroVironment to achieve our near-term business objectives."

However, not all investors will be particularly pleased with the company's outlook for the remainder of the fiscal year. The company said that it now expects that revenue will likely be toward the lower end of its previous guidance range of $260 million to $280 million for the full year. Moreover, AeroVironment guided investors toward the bottom part of the earnings guidance range of $0.20 to $0.35 per share as well.

Nevertheless, shareholders in AeroVironment seemed happier about the fact that the company managed to avoid the brunt of feared losses, and the stock climbed more than 5% in after-hours trading following the announcement. Looking ahead, AeroVironment will need to recover from the tailspin of its drone business and seek ways to participate in the industry's growth, but it could take more time before investors start to see growth and consistent profits from the company.

10 stocks we like better than AeroVironment
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and AeroVironment wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of February 6, 2017

Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends AeroVironment. The Motley Fool has a disclosure policy.