This Defense Stock Is Flying Higher As Drone Warfare Takes Off

Russia’s invasion of Ukraine has been a proving ground for drone warfare. And AeroVironment has flown to the front of the pack, emerging with a strong tailwind of orders behind it and providing a boost for AVAV stock.

X

Demand is growing for AeroVironment’s Switchblade 600 tactical missile system. The device has a 24-mile range and can stay aloft for 40 minutes as the operator seeks a target for its armor-piercing warhead. Recent order momentum is coming from Ukraine and the U.S. — and now Israel.

On Tuesday, media reports in Israel said the government has asked the U.S. for 200 Switchblade 600s. The weapons — sometimes called suicide drones because they smash into their targets and explode — are formally known as loitering munitions. They also can abort the mission at any time and focus on another target.

The Israeli business would provide validation for another reason, says William Blair analyst Louie DiPalma. He points out that Israel is home to two of AeroVironment’s most formidable competitors for loitering missiles: privately held UVision and Elbit (ESLT). DiPalma estimates the contract could be worth $40 million.

“The potential orders and our conversations also suggest that the Switchblade 600 has leapfrogged competitor offerings after a slow start,” DiPalma wrote in a Thursday note to clients.

AVAV Stock: A Portfolio Of Drones

Based in the Washington suburb of Arlington, Va., AeroVironment sells intelligence, surveillance and reconnaissance drones, as well as loitering munitions. Several of its systems are making a mark in Ukraine and winning business from other U.S. allies, such as Israel.

AVAV stock is hovering around a buy zone with a 123.34 entry out of a cup-with-handle base, according to MarketSmith. Shares briefly rose above the buy point earlier this week amid news about Israel’s request for Switchblade 600 loitering missiles.

The company hopes to play a big role in new U.S. drone programs. They include the Pentagon’s recently announced Replicator program to develop swarms of combat drones equipped with artificial intelligence.

In September, Chief Executive Wahid Nawabi said the U.S. Army recently awarded AeroVironment another Switchblade 600 contract for the Ukraine Security Assistance Initiative. Nawabi spoke on the company’s earnings call for its fiscal first quarter that ended in July.

In addition, the Army said last month it plans to buy 100 Switchblade 600s for its new Low Altitude Stalking and Strike Ordinance program, or LASSO, to arm troops with lethal unmanned systems.

In an October note, DiPalma wrote that the ultimate value of the LASSO program may be worth several billion dollars. He sees AeroVironment as “the clear favorite.”

Puma Drones Fuel AVAV Stock

Meanwhile, the company’s Puma reconnaissance drone also continues to see order momentum. The device helped drive 45% revenue growth to $98.2 million for AeroVironment’s unmanned systems segment, its largest unit, in the first quarter. Overall revenue grew 40% to $152.4 million. Sales of loitering munitions rose 34% to $30.9 million.

CEO Nawabi said on the September earnings call that its Puma drones “are urgently needed overseas.” Demand is increasing from Ukraine and other countries for the company’s systems that he characterized as “far less expensive” and “much more effective” in the conflict with Russia than rival company drones.

At the time, Nawabi noted that the $176 million ceiling on Puma deliveries to Ukraine was nearly exhausted. Last month, though, DiPalma contended in a note that the Puma contract ceiling may have increased to at least $293 million. That could rise even further if Congress passes another large aid package for Ukraine, as President Joe Biden has requested.

Puma drones have been more resistant to attempts from Russian electronic warfare efforts to render unmanned aircraft useless. Last year, AeroVironment introduced a visual-based navigation system that enables Puma drones to function even when Global Positioning System data is denied. The drones can pass target location data to a Switchblade with a push of a button.

Also on the earnings call, AeroVironment highlighted a $42 million contract to provide Ukraine with its Jump 20 drones. These are surveillance drones that can carry armed payloads, such as Switchblade loitering munitions. That allows the Switchblade to launch from the air, effectively extending its range.

Order Backlog Surges

AeroVironment says its order backlog surged to $539.7 million at the end of its most recent fiscal first quarter. That was up more than 27% from $424.1 million three months earlier.

The backlog provides near “100% visibility” for AeroVironment’s full-year revenue outlook, AVAV stock analysts Sheila Kahyaoglu and Greg Konrad from Jefferies wrote in a recent note.

AeroVironment is their top pick among small and midcap aerospace and defense companies. They give it a buy rating with a 130 price target.

The analysts see AeroVironment as well positioned to benefit from increasing defense budgets globally and increased demand for loitering munitions and its Puma drones. Lithuania placed an order for Switchblade 600s, while France has ordered the smaller Switchblade 300s that can’t pierce armor.

Keeping ‘Pseudo-Satellites’ In The Air

Kahyaoglu and Konrad also see a potential $50 billion market for AeroVironment’s High-Altitude Pseudo-Satellites, or HAPS, but that’s a development-stage program that could stretch over a long term. The solar-powered aircraft, which can operate in the stratosphere and stay aloft for months at a time, are designed to provide communications services.

The HAPS program is part of AeroVironment’s MacCready Works segment that also includes contract work developing flight systems for Mars Sample Recovery Helicopters. The company previously worked on the Ingenuity Mars Helicopter.

The U.S. Army eliminated AeroVironment’s Jump 20 medium-size drone in May from competition for its Future Tactical Unmanned Aircraft System program. Textron (TXT), which is still in the mix along with Griffon Aerospace, produces the Shadow drone that is being replaced.

DiPalma expects a better result from the new LASSO program, partly because AeroVironment is the “near” incumbent. The company has long supplied its Switchblade 300 drone to the U.S. military, with a deployment in Afghanistan as early as 2012.

Tomahawk Acquisition

AeroVironment believes it still has a lead in drone technology and won’t give it up easily.

The company recently acquired Tomahawk Robotics for $120 million. The firm’s Kinesis control system integrates the operation of unmanned systems from different contractors. On a single screen, it provides military teams situational awareness across the battlespace, AeroVironment said in announcing the deal.

The acquisition also will accelerate deployment of new AI-enabled features AVAV has invested in, Nawabi said. The aim: “to meet the customers’ need while we’re better than anybody.”

“We’ve been investing in this category of autonomy, GPS-denied operations, contested battlefield environments like the ones that we see and witness every day in Ukraine,” Nawabi said.

AVAV Stock: Replicator Drone Program

The stakes may be huge. In August, the Pentagon unveiled the Replicator program, aiming to deploy thousands of AI-powered autonomous combat drones over 18 to 24 months.

There’s reason for urgency. Deputy Defense Secretary Kathleen Hicks said the program’s mission is to “overcome the PRC’s (People’s Republic of China’s) biggest advantage, which is mass: more ships, more missiles, more people.”

“Now is the time to scale, with systems that are harder to plan for, harder to hit, and harder to beat than those of potential competitors,” Hicks said.

On the September earnings call, Nawabi described the gist of the Replicator program as “very much focused around our system.”

“I think we’re positioned really well. I believe we will be able to participate in these opportunities,” he said.

YOU MAY ALSO LIKE:

These Are The Best 5 Stocks To Buy And Watch Now

Join IBD Live Each Morning For Stock Tips Before The Open

IBD Digital: Unlock IBD’s Premium Stock Lists, Tools And Analysis Today

How To Make Money In Stocks In 3 Simple Steps