Defense Secretary Robert Gates outlined his budget recommendations for fiscal 2010 late Monday with a major shift in strategy towards a more nimble force for smaller scale, unconventional battles. While many large programs like Lockheed’s F-22 Raptor (price tag $339 million apiece) are being cut back, there are significant increases to the budgets of areas like Intelligence, Surveillance and Reconnaissance (ISR) and Unmanned Aerial Vehicles (UAV’s).
This presents a winning situation for AeroVironment (AVAV) whose small, unmanned aircraft are currently used for intelligence gathering in places like Iraq and Afghanistan. The company’s tiny spy planes are akin to futuristic versions of the model airplanes you used to put together as a kid – they weigh only several pounds, can be carried in a backpack, and launched from the hands of a soldier. With portability, predictable cost, and the ability to gather timely intelligence, AeroVironment’s products offer tremendous value for the Pentagon.
The stock is currently offering a buying opportunity after pulling back sharply in March when the company beat earnings estimates, but gave conservative guidance for the rest of the year. The good news is that sales are still forecast to grow in the 20-25% percent range this fiscal year, in-line with their long-term target growth rate. The stock should reward investors nicely over coming quarters as the Pentagon gobbles up the company’s tiny spy planes. Using a Fibonacci retracement, a good entry point is around the 22.69 level – the stock should have new highs in sight before the end of the year.
