AVAV - AeroVironment Company Profile

AeroVironment, Inc. designs, develops, produces, supports, and operates unmanned aircraft systems (UAS) and efficient energy systems (EES) in the United States and internationally. The company offers small UAS products to deliver intelligence, surveillance, and reconnaissance; and communications, such as real-time tactical reconnaissance, tracking, combat assessment, and geographic data to the small tactical unit or individual operator. Its small UAS wirelessly transmit critical live video and other information to a hand-held ground control unit enabling the operator to view and capture images; ground control systems allow the operator to control the aircraft; and tactical missile systems designed to be reusable for various flights and to be recovered through an autonomous landing feature that enables a controlled descent to a designated location. The company also provides spare equipment, alternative payload modules, batteries, and chargers; repair, refurbishment and replacement, training, and customer support services to small UAS; turnkey information solutions; and engineering services. It serves the U.S. Department of Defense, including the U.S. Army, Marine Corps, Special Operations Command, Air Force, and Navy, as well as commercial, consumer, and government customers. The company was founded in 1971 and is headquartered in Monrovia, California. Company description from FinViz.com.

AVAV had two divisions. One made unmanned aircraft systems (UAS) or drones and the other made charging systems for electric vehicles. The charging systems had a 25% margin and the drones a 40.6% margin. Their drone business is accelerating rapidly and they elected to sell the charging business and the sale was announced last week.

Now that they are free of the effort and overhead of managing a completely unrelated business thye can focus on the UAS systems. Business there is exploding, literally.

Previously they sold UAS to the military for surveillance. If something broke it was replaced but after you sell 50 units to one branch of the military that market is saturated until several break or crash.

They came up with a new product which has a small warhead attached. The two-feet long, six pound UAS is carried in a backpack until needed. When launched it is powered by a battery and sends streaming video back to the operator. This serves two functions. First it is a surveillance drone. Operators can see troop positions, tank emplacements, command and control centers, vehicles, etc. The drone can loiter in the area and observe troop movements, etc. If they see something target worthy they simply arm the warhead and fly the drone into the target. The small warhead limits collateral damage but is sufficient to knock out ground targets like vehicles. The good news is that every time the "Switchblade" drone is used in this manner they need to buy another one and they are buying a lot.

Recently the Army ordered $15.8 million in Switchblade drones. One week later they ordered $6.6 million more and then a day later they placed another order to bring the total to $29 million. Over a nine-day period the army's rapid equipping force (REF) ordered $51.4 million. That is 23% of AVAV's annual revenues in a 9 day period on a new product. The company is ramping up production to cover orders from other service units and revenue in 2018 is going to be explosive, literally. Col Pete Newell, director of the REF said the soldiers on the ground in Afghanistan "needed dramatically more" of the Switchblade units. The company is working on providing multiple models with advanced capabilities to fill out the offering and fill additional military needs.

This play has some danger attached. Earnings are June 26th. While they have beaten estimates in 3 of the last 4 quarters, there is always the risk of a miss. I am recommending this position ahead of earnings with a plan to add to the position if we get a post earnings dip. Shares are about to break out to a new high.

If you are concerned about buying ahead of earnings, then wait until after the report to enter the position.

There are no leaps so we are going to use the December options.

Buy Dec $65 call, currently $6.20, stop loss $53.
Optional: Sell short Dec $50 put, currently $2.80, stop loss $53.65.
Net debit $3.40.

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