Today witnessed a 5% decrease in AeroVironment's share price.
AeroVironment (AVAV 1.35%) stock plummeted 5.1% by 10:10 a.m. ET on Tuesday, following investment bank Jefferies' decision to decrease its rating on the company that manufactures military drone aircraft.
Insights from Jefferies analyst Greg Konrad suggest that AeroVironment stock was downgraded from 'buy' to 'hold' due mainly to valuation concerns, with the stock's astronomical 87% rise in share price this year.
The influence of the "post-Trump boom"
Konrad attributes AeroVironment's impressive gains to "enhancing fundamentals" -- and they certainly are. Fiscal 2024 saw a 33% surge in sales, with the first quarter of 2024 seeing yet another 25% increase. Gross profit margins have grown exponentially for the past three years, while operating and net profits firmly remain positive. Konrad also highlights the "post-Trump boom" as a contributing factor to the boost in AV shares, primarily due to heightened expectations of increased military spending under the new administration.
However, it is worth noting that the previous administration was already generous to AV in terms of revenue growth. If the Trump administration were to be even more generous, it might equate to more degrees of progress rather than a complete reversal of any negative trends.
Is paying 34 times EBITDA too much for a defense stock?
This valuation hesitation from Konrad may stem from AeroVironment's current valuation of 34 times earnings before interest, taxes, depreciation, and amortization (EBITDA), roughly double the valuation of other mainstream defense stocks like Lockheed Martin or General Dynamics. Given that defense stocks are generally overvalued today, the fact that AeroVironment shares cost twice as much as other stocks on the market is, in fact, a cause for concern.
Based on my calculations, AeroVironment stock currently surpasses 8 times trailing sales, 110 times trailing earnings, and an astounding 180 times trailing free cash flow. It is no surprise, then, that Jefferies suggests investors hold off and wait for "a more acceptable purchase price point" before investing in any additional AeroVironment stock.
And as a final thought -- you might have to be patient for quite some time before this stock becomes affordable enough for purchase.
Given the high valuation of AeroVironment's stock, with a 34 times EBITDA ratio, Jefferies analyst Greg Konrad suggests that investors should consider waiting for a more reasonable purchase price point, as the current price is significantly higher than that of comparable defense stocks. Moreover, managing one's finances wisely in the world of investing often involves careful consideration of opportunities for long-term returns, which may require a strategic approach to cash flow and potential future price fluctuations.
