Published on April 30th, 2019 by Harvi Sadhra
This is a guest contribution by Harvi Sadhra of Hashtag Investing. Hashtag investing is an exclusive community for active investors to get real-time feedback and discover compelling stocks and strategies any time.
Drones (also called unmanned aerial vehicles, or UAVs) are used in defense for surveillance and reconnaissance, remote communications, enemy tracking, bomb detection, real-time assessment of a battle situation, and in searching for injured or lost troops. They can even be used for delivering reinforcements and air strikes in anti-terrorist measures.
Commercial or civil applications of drones include filming, journalism, shipping and delivery in e-commerce, disaster management and relief, rescue and emergency, archaeological restoration, mapping, law enforcement, agriculture, wildlife and anti-poaching and weather forecasting.
Drones also find use in telecommunications, mining and insurance. The technology and use cases for drones have both ramped up significantly in recent years.
The Market Opportunity
According to Goldman Sachs research in 2016, drones are a business opportunity worth $100 billion, comprised of:
- Defense | $70 billion
- Consumer | $17 billion
- Commercial/civil | $13 billion
The US military is expected to boost its use of drones over the coming years. Amounts of $3.7 billion in new spending on unmanned/autonomous systems technology and $927 million for artificial intelligence and machine learning projects were included in the 2020 defence budget request from the President.
By 2026, McKinsey estimates that “commercial drones – both corporate and consumer applications – will have an annual impact of $31 billion to $46 billion on the country’s Gross Domestic Product.”
The market opportunity is clear and undeniable, and it makes sense to look for investing opportunities in companies operating in this growing sector.
Here’s a list of the top 10 drone companies to keep on your radar during 2019.
Drone Stock #1 | AeroVironment, Inc. (AVAV)
This company is the single best candidate for a pure-play exposure to drones, both military and civilian. AeroVironment last year jettisoned its electric vehicle charging business to German auto components company Webasto for $35 million. The business was a drag on the company’s profits and performance.
Going forward, AeroVironment is solely focused on the manufacture of drones and is the largest supplier of small, unmanned aircraft systems (UAS) to the Pentagon and to numerous allied nations.
The company’s products also cater to law enforcement agencies, farmers, and energy providers.
Its High-Altitude Pseudo-Satellite or High-Altitude Platform Station [HAPS] joint venture with Japan’s SoftBank Corp announced last week the assembly of the first HAWK30 vehicle, which is designed to deliver telecommunications, networking, and other types of connectivity from the sky to the ground. Powered by solar panels, and having a wing span of 260 ft, the HAWK30 can fly 65,000 ft above sea level. It can continue a mission for many months without having to land.
The company also recently deployed its Quantix hybrid UAS for the National Park Service to help photograph and map burned areas of the November 18 Wolseley Fire near Los Angeles.
Last month, the company reported fiscal third quarter revenue of more than $75 million, which were up by 38% year-on-year. Gross margin of 40% increased by 7 percent, while earnings-per-diluted-share from continuing operations of $0.35 swung around from a loss of $0.02. Funded backlog of $133 million increased by 17%. Cash as at the end of the quarter was $322.1 million.
For the full year the company stuck to its revenue guidance of between $300 million and $310 million but boosted its expectations for EPS to between $1.60 and $1.80, following its strong performance.
In summary, this is a drone company that has focused on its core business; a core business which is performing well in a high-growth market, is cash rich, and is still relatively small. The stock has corrected sharply by nearly 43% from its 52-week high and may be forming a double-bottom.
Drone Stock #2 | Northrop Grumman Corporation (NOC)
In June last year Australia bought the first of six U.S.-manufactured long-range drones that will cost $5.1B, buying an MQ-4C Triton from industrial sector company Northrop Grumman. The drone, which has the same wingspan as a Boeing 737, will be used along with P-8A Poseidon aircraft for long range operations, intelligence gathering and surveillance by Australia.
Northrop is also developing high-altitude, all-weather spy drones for NATO that will play a role in counter-terrorism, in protection of ground troops and for border control. These drones are a derivative of Northrop’s Global Hawk drone.
The company’s RQ-4 Global Hawk achieved a historic first by landing during the Avalon 2019 air show in February.
Northrop’s Polar Eye drone assists in wildlife conservation by mapping ice formations across polar bear habitats in the Arctic.
Northrop is a defence-to-space conglomerate and the drone business is housed in its Autonomous Systems division.
Last week, the company delivered a solid earnings beat, reporting EPS of $5.06 which beat by $0.46. However, revenue at $8.19 billion missed estimates by $150 million, though it was up 21.5% year on year. It declared FY 2019 EPS guidance of $18.90-$19.30 against analyst estimates of $18.92.
NOC currently trades at a P/E ratio of 15.05 and a Price/Book ratio of 5.51. Its market cap is $48.13B.
The stock has corrected from its 2018 high of $350 but moved off its 52-week low by 26.61%.
Drone Stock #3 |Drone Delivery Canada (TAKOF)
Drone Delivery Canada has been developing its drone delivery technology over the past five years. It will address the logistics needs of retailers, service organizations and government agencies in a highly scalable and cost-effective manner.
Last month the company showed off its largest cargo and farthest range delivery drone, ‘The Condor,’ the next generation in the company’s drone delivery cargo aircraft. Powered by a gas propulsion engine, the Condor can carry 180 kg up to 200 km and can take off and land vertically.
The company expects to commence commercial operations and generate revenues in 2019, and declared earlier this month that it sees potential in eight additional business verticals: Healthcare, Pharmaceuticals, Oil & Gas, Mining, Agriculture, Forestry, Construction and Courier Companies.
Drone Stock #4 | Kratos Defense & Security Solutions, Inc. (KTOS)
Kratos is a defense player with capabilities in unmanned aerial systems (UAS) and unmanned control systems, both activities being a part of its Unmanned Systems Division. The other business segment of the Company is the Government Solutions segment which provides military products and services such as satellite communications, microwave products and defense and rocket support services.
The UAS business is responsible for the design and manufacture of state-of-the-art, unmanned aerial system solutions and high-performance aerial target systems, including training and logistics support.
In November last year Kratos received $15.2M in contract awards for High Performance Unmanned Aerial Drone, Unmanned Ground and related Unmanned System products and services.
In February the company received approximately $14M in unmanned aerial drone system related contract awards, including for its newest class of tactical/ISR unmanned aerial system called Aethon.
Last month, the Kratos unmanned XQ-58A Valkyrie demonstrator completed its maiden flight. The new low-cost, runway-independent demonstrator drone is a long-range, high-subsonic unmanned air vehicle that will help in the development of future combat drones. The drone is being jointly developed with the US Air Force Research Laboratory.
The company develops drones for both US defense and international customers.
Kratos has a market cap of $1.69B and a Price/Book ratio of 3.18. For the quarter ended December 2018 EPS at $0.09 beat estimates by $0.03 though revenue of $164.40M (which was down by 18.69% year-on-year) missed by $23.84M.
In its earnings call it disclosed that the UAS division clocked organic growth of 75% over the past 24 months. “We see 2019 as the year that Kratos is established as the world leader in the high performance unmanned aerial drone system product class that we’re in, which we see as a multi-billion-dollar opportunity for our company,” the company said.
Technically, the stock has corrected after touching a 52-week high of $17.87, but the price action in the latest week shows a bullish candle indicating a possible resumption of the uptrend.
Drone Stock #5 | Drone Aviation Corp (DRNE)
Drone Aviation Corp is a developer of tethered aerial platforms that are used by the military, border security personnel and for national security. Products are designed to provide secure and reliable aerial monitoring for extended duration while being secured to the ground via a high strength armored tether.
Its flagship products are the WASP Tactical Aerostat and the WASP Lite aerostat systems. The Drone Aviation WASP is used by Border Patrol in the sensitive south-west of the nation. The all-weather, tethered drone is silent, persistent, and can carry advanced payloads. It is mobile and agile and easily launched/recovered.
These systems are a useful mid-point between massive aerostats and free flying drones. DRNE has patented its tethering system – a smart leash that is a conduit for power, communications, and persistent, reliable control to the airborne platform.
The company had a somewhat watershed moment in January this year, when it tied up arrangements to increase production capacity after it was selected by a prime contractor for an initial $3.8 million award. These events followed up on the closing of an initial $2 million in equity capital through placement to accredited investors. Prior to that, the company had eliminated its entire convertible debt. These events have bolstered the balance sheet and cash situation of the company.
The company is small, having a market cap of just $27.93M and annual revenue of $2.72M. The stock has corrected sharply after reaching a high of $2.00 in February and is trading at $1.01.
Drone Stock #6 | Alphabet Inc. (GOOG)
Google’s Wing Aviation last week received the first go-ahead from the FAA to commence deliveries via drones.
The approval clears the way for Wing to deliver commercial packages using drones later this year in Blacksburg, Virginia. The certification is in the same class as that granted to charter airlines and small air-cargo carriers, allowing Wing to cover longer distances and charge accordingly.
The Wing mobile app enables a customer to order an item from a merchant such as a meal, beverages or OTC drugs. The merchant calls for a drone delivery once they have packed and readied the goods for shipment. Wing’s UTM software plots the route from the merchant to the customer and uploads the flight plan to the drone. The drone arrives at the merchant pick-up point, and hovers at about 7m while the merchant hooks up the package to the drone’s tether. The drone then proceeds to the drop point and descends to a height of 7m at which point the tether is released to the ground with the package. Item delivered; the drone returns to the Wing site.
The Wing website currently shows delivery locations as Australia (Canberra) and Finland (Helsinki).
This drone delivery operation is small in the context of Alphabet’s overall business, but it’s received a shot in the arm with the FAA green light.
Drone Stock #7 | NVIDIA Corporation (NVDA)
NVIDIA is not a pure play on the drone segment but is included in this list for its cutting edge contribution to drone software.
The Nvidia Jetson series of embedded computing boards provide an AI platform so that autonomous machines run faster and with less power. The Jetson Xavier is a System on a Chip (SoC) that is claimed to enable developers to build autonomous machines (such as drones, robots and self-driving cars) for solving the most grueling problems.
Nvidia researchers have developed a drone that is independent of GPS and navigates by using deep learning and computer vision powered by the Jetson TX1 embedded SoC. Ultimately, this drone could be used to locate survivors in collapsed buildings or even examine submerged cables.
Though this business may be currently small in Nvidia’s overall operations, it has achieved early-mover advantage and holds promise given the projected growth in the drones market.
The stock is currently trading at $179.60, having corrected sharply from its October 2018 high of $292.60.
Drone Stock #8 | Lockheed Martin Corporation (LMT)
Lockheed Martin Corporation (LMT) is a top-drawer defense company that operates in four segments: Aeronautics (combat aircraft and UAVs), Missiles and Fire Control (air and missile defense systems, precision strike weapons), Rotary and Mission Systems (helicopters, ship and submarine mission systems, radar systems), and Space (satellites, space transportation systems).
Drones are a part of its Autonomous and Unmanned Systems business:
- The ARES program is developing compact, unmanned, high-speed vertical takeoff and landing (VTOL) delivery systems that can transport various payloads.
- The Desert Hawk series of unmanned aircraft systems has already proven itself in battle and the Desert Hawk III is said to provide the most persistent surveillance in its class.
- The Indago quadrotor UAS is used in precision agriculture, firefighting, first response, and mapping. It weighs less than 5 lbs. and can be quickly folded and packed within 60 seconds. It can be airborne in just 2.5 minutes.
- The K-Max power lift helicopter, manufactured by Kaman Aerospace Corporation, has been converted into an unmanned aerial system that finds use in fire-fighting, delivery of military supplies or humanitarian aid. It can lift/deliver up to 6,000 lbs of cargo.
- Lighter-than-air unmanned aerostats and stratospheric or high altitude airships.
The company reported a solid result for the Mar 2019 quarter, with EPS of $5.99 beating estimates by $1.65, and revenue of $14.34B (up 23.21% year-on-year) beating by $1.78B.
The company also boosted its FY 2019 guidance, revising EPS to $20.05-$20.35 from $19.15-$19.45 previously and revenues of $56.75B-$58.25B from prior guidance of $55.75B-$57.25B.
The stock is currently trading at $328.71, giving LMT a market cap of $93.01B. Obviously, at this price one is buying a lot more than the drones business.
Drone Stock #9 | The Boeing Company (BA)
The drones business is housed in the Autonomous Systems division of the company’s Defense segment. ‘Autonomous’ includes sea, air, space and remote sensing systems.
Airborne unmanned aerial systems:
- ScanEagle, a long-endurance unmanned aerial system (UAS) designed and manufactured by Insitu Inc., a wholly owned subsidiary of The Boeing Company. It requires no runway and can remain airborne for 24+ hours providing persistent imagery on land or sea
- Integrator, also built by Insitu, featuring six payload spaces and no runway required
- S-100 Camcopter, produced in partnership with Schiebel Industries. A rotorcraft UAS that can launch in 15 minutes, and can be used for tactical ISR, ground forces support, cargo/re-supply, maritime surveillance, communication relay
- Phantom Eye, a high altitude, long endurance, unmanned aerial system (UAS) that can stay aloft in the stratosphere for up to 10 days at 65,000 ft and 20 days at 20,000-25,000 ft carrying a variety of payloads
- RQ-21A Blackjack, a small tactical unmanned aircraft system, built by Insitu for the U.S. Navy and Marine Corps, for real time battle monitoring and analysis up to 16 hours a day
- QF-16 Full Scale Aerial Target made out of retired F-16 aircraft for testing newly developed weapons and tactics
The Boeing stock is currently trading at $380.25, about 15% off its 52-week high. It is currently assailed by problems in its commercial aircraft 737-MAX which has been grounded worldwide after two crashes.
Drone Stock #10 | Amazon.com, Inc. (NASDAQ:AMZN)
Amazon made a momentous announcement in its quarterly earnings conference call last week: it intended to shorten (halve) the standard Prime delivery to one day.
Behind that decision is a time-honored ecommerce reality called ‘shipping elasticity’: the shorter the delivery time the more likely that customers will add additional items to the cart.
An analyst at RBC Capital Markets said the move could spark higher growth at the company for some time.
In this scenario drone delivery takes on added significance – the ability to clip ‘last-mile’ delivery times by avoiding clogged city streets and taking a route ‘as the crow flies’.
Prime Air is Amazon’s future delivery system “designed to safely get packages to customers in 30 minutes or less using unmanned aerial vehicles, also called drones”.
The service made its first fully autonomous delivery in 13 minutes on December 7, 2016. Amazon is testing the service in multiple international locations and will deploy it upon receiving regulatory clearances.
The regulatory process has already cleared Wing Aviation, Google’s drone delivery service (as mentioned previously in this article).
Final Thoughts
The drone market is growing rapidly. Drones may seem like science fiction, but we may one day see drones buzzing overhead delivering everything from pizza to pharmaceuticals.
In the meantime, the 10 drone stocks discussed in this article are worth keeping an eye on.
With that said, one final caveat; investing in high growth stocks is a risky endeavor. Often, these stocks trade for lofty valuations with unproven business models. Alternatively, many of the larger securities in this article have ‘normal’ business operations that dwarf their drone operations. This means that even a success in the growing UAV industry may not significantly ‘move the needle’ for some of these larger companies.
Prudent investors should always do diligent research and valuation analysis before investing in any individual security. This is doubly true for businesses in fast-growing industries that have short corporate histories.
