2 Defense Companies Target Navy Drone Market

AeroVironment makes drones in all shapes and sizes. Image source: AeroVironment.

The U.S. Navy is looking for a few good... drones.

We've already told you about DARPA's plan to develop a midsize naval drone capable of landing on and launching from warships as small as naval frigates. But the Navy operates boats even smaller than those -- coastal patrol and riverine boats, for example -- and those boats could also use some eyes in the sky. (And in any case, the drone being tested for use on frigates, Northrop Grumman'sTERN, isn't yet in production.)

So, as Naval-Technology.com reported earlier this week, the Navy has begun testing a new drone from small drone specialist AeroVironment (NASDAQ: AVAV) that can be put into operation today. Dubbed the RQ-20B Puma AE, it's a "block 2" upgrade of AeroVironment's 14-pound Puma AE ("AE" designates all-environment, meaning it's rated for use at sea). Battery-powered, Puma boasts more than 3.5 hours of flight endurance and a range of nine miles. Measuring 4.6 feet by 9.2 feet (length and wingspan), it can be launched by hand or off a rail, and it can eitherbe operated remotely or fly autonomously using GPS for navigation, spying out targets and transmitting data wirelessly back to the mother ship.

In short, it's one good option the Navy can use to outfit its smaller boats -- and in fact, earlier versions are already in use by U.S. Special Operations Command and the U.S. Navy Expeditionary Combat Command Coastal Riverine Force, as well as the Marine Corps, Army, and various foreign militaries. But it's not the only option.

Meet the competition

The same week the Navy revealed its testing of AeroVironment's Puma, a rival drone maker -- Israel's Elbit Systems (NASDAQ: ESLT) -- announcedthe availability of its own new small drone for the naval market.

Elbit says it designed its Skylark C drone based on its successful Skylark 1 drone, which has also enjoyed some success internationally. In contrast to Skylark 1, though, Skylark C is designed specifically for maritime operations. Elbit doesn't reveal the exact specifications for Skylark C on its website, but assuming it's roughly similar to Skylark 1, it's... very similar to what AeroVironment is offering. For example, it weighs 16.5 pounds, and flies for three hours. The main difference is that Elbit says its Skylark can operate over ranges as far as 24 miles -- nearly three times the Puma's range.

And,Elbit says,once back at base (recovered either by flying into a net or parachuting into the water), Skylark can have its batteries swapped out and be readied to fly again in just 15 minutes!

Who wins?

Which drone will the Navy end up buying? That will probably come down to a weighing of costs against benefits.

AeroVironment's Puma costs $250,000for a complete "system," including ground controller and three drones. That's about 7.5% of the cost of a coastal fast patrol boatfor a significant upgrade in capability. Elbit's Skylark 1's are a little bit pricier -- perhaps $300,000per system, but as mentioned above, with an even bigger boost to range.

What's of perhaps even greater importance to investors, though, is what a small drone contract would mean for the stocks of the two drone makers. AeroVironment, with just $264 million in annual revenue, would get a much bigger boost from a Navy contract than would Elbit, which, according to S&P Global Market Intelligence, booked $3.1 billion in business last year.

If you're betting on a stock to get a big boost from a contract, then, AeroVironment is the better bet.

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Rich Smithdoes not own shares of, nor is he short, any company named above. You can find him onMotley Fool CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 301 out of more than 75,000 rated members.

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