Aerospace and defense company AeroVironment (NASDAQ:AVAV) reported Q3 CY2024 results topping the market’s revenue expectations, with sales up 4.2% year on year to $188.5 million. On the other hand, the company’s full-year revenue guidance of $805 million at the midpoint came in 2.8% below analysts’ estimates. Its non-GAAP profit of $0.47 per share was 30.9% below analysts’ consensus estimates.

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“AeroVironment continues to deliver strong results, including record second-quarter revenue along with a healthy funded backlog that is 25% higher than the prior quarter,” said Wahid Nawabi, AeroVironment chairman, president and chief executive officer.

Company Overview

Focused on the future of autonomous military combat, AeroVironment (NASDAQ:AVAV) specializes in advanced unmanned aircraft systems and electric vehicle charging solutions.

Defense Contractors

Defense contractors typically require technical expertise and government clearance. Companies in this sector can also enjoy long-term contracts with government bodies, leading to more predictable revenues. Combined, these factors create high barriers to entry and can lead to limited competition. Lately, geopolitical tensions–whether it be Russia’s invasion of Ukraine or China’s aggression towards Taiwan–highlight the need for defense spending. On the other hand, demand for these products can ebb and flow with defense budgets and even who is president, as different administrations can have vastly different ideas of how to allocate federal funds.

Sales Growth

A company’s long-term sales performance can indicate its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Over the last five years, AeroVironment grew its sales at an incredible 18% compounded annual growth rate. Its growth beat the average industrials company and shows its offerings resonate with customers.

Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. AeroVironment’s annualized revenue growth of 31.1% over the last two years is above its five-year trend, suggesting its demand was strong and recently accelerated.

We can dig further into the company’s revenue dynamics by analyzing its most important segments, Products and Services, which are 80.2% and 19.8% of revenue. Over the last two years, AeroVironment’s Products revenue (aircrafts, missile systems, satellites) averaged 71.2% year-on-year growth. On the other hand, its Services revenue (maintenance, training, consulting) averaged 19.5% declines.

This quarter, AeroVironment reported modest year-on-year revenue growth of 4.2% but beat Wall Street’s estimates by 3.9%.

Looking ahead, sell-side analysts expect revenue to grow 17.4% over the next 12 months, a deceleration versus the last two years. Despite the slowdown, this projection is healthy and implies the market is baking in success for its products and services.

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Operating Margin

AeroVironment was roughly breakeven when averaging the last five years of quarterly operating profits, one of the worst outcomes in the industrials sector.

Looking at the trend in its profitability, AeroVironment’s operating margin decreased by 5.7 percentage points over the last five years. The company’s performance was poor no matter how you look at it. It shows operating expenses were rising and it couldn’t pass those costs onto its customers.

In Q3, AeroVironment generated an operating profit margin of 3.7%, down 10.2 percentage points year on year. This contraction shows it was recently less efficient because its expenses grew faster than its revenue.

Earnings Per Share

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

AeroVironment’s EPS grew at an unimpressive 7.4% compounded annual growth rate over the last five years, lower than its 18% annualized revenue growth. This tells us the company became less profitable on a per-share basis as it expanded.

Diving into the nuances of AeroVironment’s earnings can give us a better understanding of its performance. As we mentioned earlier, AeroVironment’s operating margin declined by 5.7 percentage points over the last five years. Its share count also grew by 17%, meaning the company not only became less efficient with its operating expenses but also diluted its shareholders.

Like with revenue, we analyze EPS over a shorter period to see if we are missing a change in the business.

In Q3, AeroVironment reported EPS at $0.47, down from $0.97 in the same quarter last year. This print missed analysts’ estimates. Over the next 12 months, Wall Street expects AeroVironment’s full-year EPS of $2.42 to grow 56.2%.

Key Takeaways from AeroVironment’s Q3 Results

We were impressed by how significantly AeroVironment blew past analysts’ revenue expectations this quarter. We were also glad its Services revenue topped Wall Street’s estimates. On the other hand, its EBITDA missed significantly and its EPS fell short of Wall Street’s estimates. Overall, this quarter could have been better. The stock traded down 8% to $181.25 immediately following the results.

The latest quarter from AeroVironment’s wasn’t that good. One earnings report doesn’t define a company’s quality, though, so let’s explore whether the stock is a buy at the current price. When making that decision, it’s important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it’s free.