AeroVironment has followed the market’s trajectory closely, rising in tandem with the S&P 500 over the past six months. The stock has climbed by 8.6% to $261.95 per share while the index has gained 6.2%.
Is now the time to buy AeroVironment, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Is AeroVironment Not Exciting?
We're sitting this one out for now. Here are three reasons why AVAV doesn't excite us and a stock we'd rather own.
1. Shrinking Operating Margin
Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.
Analyzing the trend in its profitability, AeroVironment’s operating margin decreased by 8.4 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. AeroVironment’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers. Its operating margin for the trailing 12 months was negative 6.5%.
2. EPS Took a Dip Over the Last Two Years
While long-term earnings trends give us the big picture, we also track EPS over a shorter period because it can provide insight into an emerging theme or development for the business.
Sadly for AeroVironment, its EPS declined by 9.9% annually over the last two years while its revenue grew by 44.8%. This tells us the company became less profitable on a per-share basis as it expanded.
3. Free Cash Flow Margin Dropping
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, AeroVironment’s margin dropped by 19 percentage points over the last five years. Almost any movement in the wrong direction is undesirable because it is already burning cash. If the trend continues, it could signal it’s becoming a more capital-intensive business. AeroVironment’s free cash flow margin for the trailing 12 months was negative 17.6%.
Final Judgment
AeroVironment isn’t a terrible business, but it isn’t one of our picks. That said, the stock currently trades at 57.6× forward P/E (or $261.95 per share). This valuation tells us a lot of optimism is priced in - we think other companies feature superior fundamentals at the moment. We’d recommend looking at the most dominant software business in the world.
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