Drones Just Took Two Giant Steps Toward Daily Use; AeroVironment Is Your Best Play

Coming to the skies above your neighborhood: commercial unmanned aerial vehicles (UAVs). It seems like science fiction, but UAVs will soon dot the national airspace to perform a range of non-military functions from delivering packages to spraying crops to inspecting oil pipelines.

The company most likely to benefit from this trend is AeroVironment (AVAV) . The Monrovia, Calif.-based company is the country's largest manufacturer of UAVs and is known for its innovative products. Revenue and net income both rose in the last quarter, and the company is spending wisely on research and development that will keep its products cutting edge. 

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In recent weeks, two major developments brought drones closer to daily use. The NASA Armstrong Flight Research Center in California this month completed the first phase of flight tests on detect-and-avoid technology that will allow large UAVs to operate in the national airspace above 500 feet.

In late June, the Federal Aviation Administration (FAA) released its long-awaited rule for small UAVs weighing less than 55 pounds conducting commercial operations. Key aspects of the rule include:

  • A requirement for UAV pilots to keep their aircraft within visual line of sight.
  • Allowing UAV operations during daylight and at twilight for drones equipped with anti-collision lights.
  • Height and speed restrictions and other operational limits, such as prohibiting flights over unprotected people on the ground who aren't directly participating in the UAV operation.
  • A process to waive some restrictions if an operator proves the proposed flight will be conducted safely under a waiver.

According to industry estimates, the new FAA rule could generate more than $82 billion for the U.S. economy and create more than 100,000 new jobs over the next decade.

The main beneficiary of these tailwinds: AeroVironment, the largest manufacturer of UAVs in the country. The company's forte is making innovative, small UAVs that have the ability to carry payloads and are fitted with GPS systems and contact avoidance systems. These are the types of units that would help Amazon CEO Jeff Bezos realize his bold vision of using UAVs to deliver packages door-to-door.

AeroVironment's UAVs serve a wide array of military and civilian functions and feature such colorful names as Puma, Raven, Wasp, and Switchblade. The company also makes systems for cleaner, more efficient transportation and energy production. This small-cap rocket (market cap: $631.57 million) is poised to be a growth stock winner in 2016 and beyond.

 In June, AeroVironment reported fiscal 2016 earnings per share of 39 cents, a whopping 200% increase from the previous year. Net income for the year was $9 million compared to $2.9 million in 2015. Fiscal 2016 revenue reached $264.1 million, up 2% from the $259.4 million reported last year. Operating results were boosted by orders from both the commercial and military sectors.

Aerospace expert Bill Carey, author of Enter the Drones (2016), points out in his book that AeroVironment is a pioneer in the commercialization of drones. "AeroVironment and BP claimed credit for the first FAA-approved commercial unmanned aircraft flight over land on June 8, 2014, using the Puma in Alaska," Carey writes in his definitive book.

AVAV continues to boost research and development to pave the way for future growth and currently boasts a funded backlog of $65.8 million, compared to $64.7 million last year.

AVAV shares currently trade at about $27.54. The average analyst one-year price target on the stock is $32, for a gain of 16.2%. 

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John Persinos is an editorial manager and investment analyst at Investing Daily. At the time of publication, Persinos held stock in Apple.

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