You never quite know what companies will show up on your radar when you are trolling for deeper value. These days, it is exciting to see anything new and different. It's also rare, as current market valuations don't lend themselves to a target-rich value environment. (I'm still not in the doomsday camp in terms of valuations; it is more of a purgatory situation for value investors at this point).
A new and unfamiliar name has made its way onto my double-net screen, which identifies stocks trading between 1x and net current asset value. AeroVironment (AVAV) is in the defense business, primarily building and supporting unmanned aircraft systems, more commonly referred to as drones. While the company has remained profitable, revenue has been fairly flat the past few years, and net profit margins are no longer in the high single digits the company enjoyed from 2010 to 2012.
The company had a rough first quarter as revenue fell 23%. Consensus estimates called for a loss of 15 cents per share in what is AVAV's seasonally low quarter, so the actual loss of 51 cents was a major disappointment. Shares fell 17% after the earnings announcement and are down about 25% year to date.
After all the disappointment, which has caused further skepticism about this former growth story, shares now trade at just 1.9x net current asset value. It's not cheap at 47x next year's earnings estimates. However, there's quite a wide range within that consensus, which probably means there are more surprises on the way, be they positive or negative.
The potential value story here is the balance sheet. The company ended last quarter with $224 million, or $9.76 per share, in cash and short-term investments, and an additional $33 million, or $1.44 a share, in long-term investments. The company's war chest of cash and investments at $11.20 per share should see it through a great deal of uncertainty. Debt is negligible at just $400,000.
It does seem odd that one of the top drone manufacturers has a current enterprise value of just $308 million. But that's what happens when you disappoint the market, and the world of defense, subject to politics and budgets, can change on a dime. However, given the company's specialty, its level of cash and investments and its lack of debt, I add this to the list of names that could have the makings of an acquisition target.
In a way, it reminds me of Force Protection, a small defense-related (armored vehicles) company that was acquired by General Dynamics (GD) in 2011 (way too cheaply, adds the disappointed then-shareholder).