Is AeroVironment Coming or Going?

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When your company is built on two businesses -- one in an emerging industry, and the other in an increasingly challenged sector -- it's hard for the market to know which way you're headed. AeroVironment (NAS: AVAV) is stuck in that exact spot: Anticpated defense spending cuts squeeze its Unmanned Aircraft Systems division (UAS), just as its Efficient Energy Systems (EES) segment is starting to get off the ground.

So when AeroVironment posted better-than-expected earnings yesterday, why did the stock fall almost 10%? The answer depends on where you're looking.

Flying solo
The unmanned aircraft division relies on the Department of Defense (DoD) for most of its revenue. With the budget under fire and two wars winding down (hopefully), how much growth can we possibly expect? That's a big question as AeroVironment launches new products.

The Switchblade, an exploding UAV, could redefine how we use unmanned aircraft in combat. The device can not only spot targets, but take them out on the fly.

The Shrike vertical take-off and landing (VTOL) unmanned aircraft is the latest advance in AeroVironment's fleet. The Shrike looks like a quad helicopter, and has the ability to hover and stream "several hours of live video."

If there's concern about funding future aircraft or the DoD cutting back on spending, I think AeroVironment has done a good job making itself relevant for the future. With competitors like Boeing (NYS: BA) , Lockheed (NYS: LMT) , and Textron (NYS: TXT) , AeroVironment must innovate or die. However, its backlog did fall from $82.9 million at the end of the first quarter to $72.7 million at the end of the second quarter, which has investors worried.

The future is here
Growth in the UAS division may slow, but the EES division is just starting to take off. AeroVironment's fast electric vehicle chargers have gotten the nod from Oregon, Washington, Hawaii, NRG Energy (NYS: NRG) , and BMW, among others. That popularity has powered 105% growth for the EES division in the most recent quarter, and the segment is finally becoming a substantial portion of AeroVironment's business.

Again, making further headway in this market won't be easy for AeroVironment. General Electric (NYS: GE) , Siemens (NYS: SI) , and others also compete in the vehicle charging business, and some critics still question whether electric vehicles can be sustainable. But this small player has big partners and big plans for electric vehicle charging. Before long, this business could turn into the face of AeroVironment.

Which way are we headed?
The market obviously wasn't excited about yesterday's results, but I still think the future is bright for AeroVironment. Innovative products will keep the company relevant to the DoD, and electric charger sales are just starting to ramp up. This Fool thinks the best is still to come.

Not all defense stocks should be headed for the scrap heap as defense spending declines. The Motley Fool recently compiled a free report detailing two small caps the government won't let go broke. It's free to our readers, so just click here to receive your free copy.

Interested in reading more about AeroVironment? Click here to add it to My Watchlist, and My Watchlist will find all of our Foolish analysis on this stock.

At the time this article was published Fool contributorTravis Hoiumowns shares of AeroVironment. You can follow Travis on Twitter at@FlushDrawFool, check out hispersonal stock holdingsor follow his CAPS picks atTMFFlushDraw.The Motley Fool owns shares of Lockheed Martin and Textron.Motley Fool newsletter serviceshave recommended buying shares of AeroVironment. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy. 

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