Drone Maker Aerovironment Hangs On to Win Clean-Energy Bet

(Bloomberg View) -- Clean earns more money. That's the mantra for investors reaping the reward of alternative energy outperforming fossil fuel. They've known since 2013 that you don't have to drive a Tesla or own its shares (they're up 826 percent) to benefit from green companies lapping the carbon crowd with superior perennial returns.

The emergence of clean-energy companies as market leaders comes amid the decline in the cost of producing renewable energy. Solar power's cost per megawatt hour plummeted to $83 today from $128 in 2015 and almost $315 in 2009. The cost of wind per megawatt hour is $67, down from $90 in 2009.

Aerovironment Inc., a California-based maker of solar-powered unmanned aircraft and fast-charging systems for electric vehicles, provides a useful case study. Once an obscure and minuscule firm that struggled to monetize its clean-energy ambitions, it has evolved into a billion-dollar market capitalization favorite of Blackrock Inc., the largest public investment manager.

Almost two decades before it went public in 2007, Aerovironment designed the prototype of the GM Impact, the world's first commercially-produced electric car. Even though Motor Trend said it was "the only electric vehicle that drives like a real car," and that it "proves beyond any doubt" that General Motors "knows how to build fantastic automobiles," the successor EV1 program was unprofitable and canceled in 2003. By then, the U.S. was fighting wars in Afghanistan and Iraq and Aerovironment shifted its focus from its bet on a distant clean-energy future to something decidedly tried and true: Military hardware in the form of battlefield drones.

"We started with efficient energy systems" more than 20 years ago, "before defense drones really became a business for us," said Wahid Nawabi, president and chief executive officer during a Jan. 31 interview at Aerovironment's facility in Simi Valley, California.

Only much later did Aerovironment eventually find success making fast-charging systems for modern electric vehicles, which it now helps build for Chinese, German, Italian, Japanese, Korean and U.S. automakers. 

Aerovironment survived to make that transition because the U.S. Army and other government agencies became its biggest customers early in the new century — accounting for 77 percent of sales in 2005 and about 55 percent today of more than $300 million in annual sales, according to data compiled by Bloomberg. That's because Aerovironment drones are small enough for soldiers to launch from backpacks and control with their hands to obtain data for combat, geography, tracking and birds-eye reconnaissance. The business boomed as American and allied armed forces focused on flexibility and precision and after the Federal Aviation Administration Modernization and Reform Act of 2012 expanded the use of unmanned aerial vehicles for personal and commercial use.

Now that the market for electric cars is poised for explosive growth, Aeronvironment is among the biggest beneficiaries, with electric-vehicle sales reaching 100 million by 2030 and accounting for more than 20 percent of the market on their way to 500 million by 2040, which would be 54 percent of total car sales, according to Bloomberg New Energy Finance. The market's belated acceptance of electric vehicles is driven by plummeting prices for lithium-ion batteries, "which are set to fall by more than 70 percent by 2030," BNEF says. By 2040, electric vehicles will displace 8 million barrels of transport fuel per day and add 5 percent to global electricity consumption, according to data compiled by Bloomberg.

For Aeronvironment, that means the company's 2017 revenue from efficient energy systems increased 18 percent from a year ago as reliance on drone sales shrinks. It was the biggest sales growth for the product since 2012, according to data compiled by Bloomberg.

Nawabi said that investors have responded enthusiastically to his company's shift toward chargers and commercial drones and away from military hardware, a pivot he says he emphasizes in meetings with analysts and portfolio managers.

The metrics back up his claim. Since Nawabi became CEO in May 2016, Aerovironment's share price has appreciated 67 percent, almost 3 percent more than the 20 companies that make up the Bloomberg Intelligence Global Defense Primes index and easily surpassing the S&P 500's 36 percent. Aerovironment revenue increased 37 percent last year, more than seven times the group's average growth, and analysts surveyed by Bloomberg predict that the company's sales will gain 13 percent this year, almost twice the group average.

The stock market's clean-energy advantage began in 2013 when 141 companies, identified by Bloomberg New Energy Finance and based in North and South America, outperformed the 40 conventional-energy companies in the Standard & Poor's 500 Energy Index as well as the S&P 500 and Russell 3000 Index. Tesla's total return since then is more than 15 times that of General Motors Co., enabling the Palo Alto maker of the Model S, X and 3 sedans to achieve a greater market capitalization than the biggest U.S. automaker. Similarly, Aerovironment's five-year total return of 151 percent dwarfs the 96 percent for the S&P Small Cap 600 Index and the S&P 600 Industrials Sector Index, according to data compiled by Bloomberg.

At a point when climate change and aging infrastructure are damaging the economy, Aeronvironment anticipates a burgeoning business.

Investors are the first to agree.

(With assistance from Shin Pei)

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Matthew A. Winkler is a Bloomberg View columnist. He is the editor-in-chief emeritus of Bloomberg News.

For more columns from Bloomberg View, visit http://www.bloomberg.com/view.

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