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Why Shares of AeroVironment Soared Higher on Tuesday

What happened

Shares of AeroVironment (NASDAQ: AVAV) traded up more than 10% on Tuesday after a Wall Street analyst upgraded the stock and raised his price target, arguing market sentiment surrounding the drone maker has become too negative in recent months.

So what

Shares of AeroVironment, a developer of unmanned aircraft for the military and other end users, have been trending downward following a 14% post-earnings plunge in March. The numbers weren't all that bad, but the company didn't provide enough visibility into 2020 and beyond to put investors at ease.

Image source: Getty Images.

Canaccord analyst Ken Herbert in a report out Tuesday suggested the worry surrounding the shares is overdone, upgrading the stock to a buy from a hold and raising his price target to $86 from $84. Herbert said that he is encouraged by the broad range of opportunities he sees for the company, including high-altitude pseudo-satellites, tactile missile systems, and international drone orders.

AeroVironment also recently announced it was teaming with Kratos Defense & Security Systems (NASDAQ: KTOS), currently the hottest name in drones, to explore deploying missiles and small tube-launched UAVs from larger, long-range drones.

Now what

AeroVironment even after the declines trades at 42 times forward earnings. That's cheaper than Kratos, but more than double the multiple the market assigns to larger, more diversified defense contractors.

As Herbert notes, AeroVironment has a portfolio of interesting products and a lot of ways to win. But given the stock's history of volatility, this is one best left for those with a stomach for turbulence and the patience to wait out development of a still-maturing industry.

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Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool recommends AeroVironment. The Motley Fool has a disclosure policy.


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