Why AeroVironment Stock Dropped 10% — Then Gained It All Back

What happened

Shares of aerial-drone-maker AeroVironment (NASDAQ: AVAV) took investors for a loop the loop this morning, first diving 10% after reporting Q4 and full fiscal-year 2018 earnings last night, then swinging up to book what is — as of 12:30 p.m. EDT — a whopping 7.9% gain!

So what

What explains this topsy-turvy stock performance today? Let’s start with the good news: AeroVironment “beat earnings” soundly, reporting an 18% increase in sales and a 32% increase in profits for its full fiscal year. Fiscal 2018 sales came in at $271 million, and earnings per diluted share were $0.95.

On top of that, management says its “funded backlog” has increased by 146% since the end of last fiscal year, implying strong sales and profits going forward.

AeroVironment destroyed analyst estimates in fiscal 2018. Image source: Getty Images.

Now what

Speaking of “forward,” AeroVironment also announced its guidance for the current fiscal year 2019 — and here’s where the mixed messages arrived that may explain investors’ initial reaction to sell off the stock.

According to Yahoo!Finance figures, analysts on Wall Street had been predicting that AeroVironment would record sales of $337 million this year and earn $1 a share on those sales. In its guidance, however, AeroVironment management promised no more than $310 million in sales (and perhaps as little as $290 million). Thus, from a sales perspective, AeroVironment appeared to warn investors of a “sales miss.”

On the other hand, management said it expects to earn between $1.10 and $1.40 per share — the entire range of which sits well above Wall Street expectations. Given that the ultimate goal of any for-profit enterprise should be to earn and grow profits and not just book and grow revenues, I have to think that AV’s promise of better-than-expected profits trumps any worries over lower-than-expected sales.

Turns out, AeroVironment investors agree with this way of thinking — and that’s why its stock is rebounding.

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Rich Smith 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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