AeroVironment’s stock price has taken a beating over the past six months, shedding 21.3% of its value and falling to $222.96 per share. This was partly due to its softer quarterly results and might have investors contemplating their next move.
Is now the time to buy AeroVironment, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Is AeroVironment Not Exciting?
Even though the stock has become cheaper, we don't have much confidence in AeroVironment. Here are three reasons why AVAV doesn't excite us and a stock we'd rather own.
1. Shrinking Operating Margin
Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.
Analyzing the trend in its profitability, AeroVironment’s operating margin decreased by 15.3 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 16.4%.
2. EPS Took a Dip Over the Last Two Years
Although long-term earnings trends give us the big picture, we like to analyze EPS over a shorter period to see if we are missing a change in the business.
Sadly for AeroVironment, its EPS declined by 8.4% annually over the last two years while its revenue grew by 51%. 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 6.3 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 in the middle of a big investment cycle. AeroVironment’s free cash flow margin for the trailing 12 months was negative 14.2%.
Final Judgment
AeroVironment isn’t a terrible business, but it doesn’t pass our bar. After the recent drawdown, the stock trades at 54.3× forward P/E (or $222.96 per share). This multiple tells us a lot of good news is priced in - we think there are better opportunities elsewhere. Let us point you toward one of Charlie Munger’s all-time favorite businesses.
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