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Are You Ready for the Electric Revolution?

By: Wyatt Investment Research
Posted: 2/7/2011 11:02:00 AM
Referenced Stocks: AVAV;GE;GM

Are you ready for the electric revolution in the automotive industry?

During the past few months, a limited number of Americans have begun to buy the Chevrolet Volt from General Motors Co. ( GM ) and the Leaf from Japan's Nissan (OTC: NSANY.PK).

Response thus far has been lukewarm. These vehicles are expensive, and the cost appears to overshadow consumers' perception of the eco-friendly advantages.

Potential buyers of pure electric vehicles are still wondering where they plug them in. But this concern will change as manufacturing costs come down and the price of oil rises (an inevitable future, in my opinion). Investors should be looking for ways to invest in the next great electrical infrastructure rollout - it could rival the arrival of the cable industry a generation ago.

One diversified company provides small cap investors with two investment angles to play potential infrastructure boom. At first blush, California-based AeroVironment (Nasdaq: AVAV) may seem an unlikely candidate. The company is a defense contractor - yet it has a growing green technology business that could provide a platform for future expansion. AeroVironment's primary business, until recently, has been selling unmanned aircraft systems, also known as remote-controlled drones. Since 1986 the company has sold these drones to the U.S. military and its allies.

The mini-aircraft help the military gather reconnaissance data from the battlegrounds of Afghanistan and Iraq, and also help in monitoring forest fires and volcanic eruptions. They also provide surveillance to make sure pipelines aren't leaking, and help authorities patrol the porous U.S. borders for illegal activities.

AeroVironment says the high-tech aircraft are small enough to fit in a rucksack. The Raven, with a five-foot wingspan, weighs about four pounds, and troops on the battlefield can launch them by hand, to see what they can't.

***But as every the defense contractor has endured painful budget cuts in recent years. In February 2010, a defense budget reduction in the Raven drone program weighed heavily on the stock. The U.S. government allotted 56 percent less for the program in the fiscal 2011 year that began October 1.

In 2010, AeroVironment's stock closed the year down 8 percent. But recently, shares have rebounded by about 20 percent and the 50-day moving average recently crossed above the 200-day moving average, a bullish technical signal known as a 'Golden Cross.'

The stock has been pushed higher because the company is now supplying the guts of electric vehicle charging stations. In the company's fiscal year that ended last April, this business accounted for about 10 percent of revenue.

AeroVironment was selected to build up to 100 electric vehicle fueling stations in seven cities in South Carolina. The company is also part of the rollout of the Nissan Leaf, the first commercially available car powered entirely by electricity, and is working on the residential infrastructure needed to make the all-electric models practical.

NRG Energy picked AeroVironment in November 2010 to build the first privately funded electric charging system for the city of Houston, Texas - the fourth-largest U.S. city. In San Francisco, the Bay Area Air Quality Management District recently awarded AeroVironment $350,000, part of a $3.9 million effort to spread the build-out of electric vehicle charging stations.

Besides consumer vehicles, the company's charging systems also are used in industrial applications.

***As demand rises for these vehicles, so will the competition. But AeroVironment has a head start, and a wealth of government funded research in its back pocket. The growth in the industry signals that there is money to be made. For example, General Electric ( GE ) made a big show last summer with plans to roll out charging stations for electric vehicles.

AeroVironment has a market cap of $605 million and 16 analysts following the stock - half rate it a hold, the other half a buy.

Thanks to its military contracts, AeroVironment remained profitable through the recession, and posted a $20.7 million profit in the last fiscal year. And while the military has scaled back the Raven program, the U.S. Army did place a $46.2 million order in December, and a $7.8 million upgrade order in January.

For the just-ended fiscal third quarter, the consensus analyst estimate is a 31 percent increase in revenue, to $80 million, and a 29 percent increase in earnings, to $0.39 per share, as compared to the year-ago period. For fiscal year 2011 analysts expect flat earnings, and 13 percent revenue growth to $282 million.

But growth could be faster if the electric vehicle movement catches on. Right now electric charging systems account for just a fraction of the company's overall business. I consider AeroVironment a bargain with limited downside.

AeroVironment is just one small cap stock worth your consideration. Click here to learn more about why this exciting class of stocks, and why small cap stocks ALWAYS outperform coming out of a recession.

Disclosure: None