Profiting From the Success of Unmanned Aerial Vehicles (UAV)

January 13, 2010 3:10 PM EST
In a new strategy for the U.S. military, 16 Taliban were killed in the volatile Afghanistan province of Helmand on Tuesday by a strike from two unmanned aerial vehicles, according to the military command in Kabul.

While the use of UAVs is not a new development for U.S. military tactics, the move to use combat capable versions of the aircrafts within Afghan borders is. UAV use in Afghanistan has been restricted to surveillance and recon missions in the past.

The expansion of use for UAVs may have an impact on the companies that are manufacturing these weapons in the near and distant future.

"Unmanned aerial vehicles are an invaluable component of our national security efforts," North Dakota Congressman Earl Pomeroy said.

Historically, UAVs have been simple drones used in military applications, but technology is advancing and the uses for the machines are expanding.

There are two typical types of UAVs: some fly autonomously and are controlled by pre-programmed flight plans using complex automation systems, others are controlled remotely controlled from a remote location by a UAV pilot.

Currently UAV drones are capable of performing a wide range of tasks, including recon and attack missions and have been credited with many successful attacks on militants in recent conflicts. The biggest military advantage that UAVs provide is the protection it gives to soldiers by taking them out of the line of fire.

Critics of the use of UAVs have cited the collateral damage and erroneous target causing civilian casualties.

The UAV market is currently dominated in the U.S. market by two companies, Northrop Grumman (NYSE: NOC) and General Atomics Aeronautical Systems Inc.

Northrop Grumman is best known in the industry for its High Altitude Long Endurance Global Hawk UAV family used by the U.S. Air Force as surveillance aircrafts.

Shares of Northrop Grumman are on the mend after being hit hard by the recession. The stock bottomed out in March 2009 at the height of the economic crisis at $33.81, but with the success of using UAVs and positive promotions by senators such as Republican John McCain the shares have rebounded to a levels not seen since September 2008 near $60.

In the most recent earnings report from Northrop Grumman the company stated it increased earnings by 4 percent to $8.73 billion, as a result of a 5 percent sales increase for the company's its Aerospace Systems and a higher volume for its unmanned aircraft programs such as Broad Area Maritime Surveillance Unmanned Aerial System (BAMS UAS), Global Hawk and Navy Unmanned Combat Air System (N-UCAS).

Aerospace system operating income rose 14 percent, as the percentage of total sales coming from the sector increased to 10.5 percent. Northrop Grumman cited improved program performance from UAVs as a key to this growth.

General Atomic, which is not a publicly-traded company, is a key to the sector as its Predator UAV line is a major player in the industry. General Atomic split off from General Dynamics (NYSE: GD) several years ago.

Textron Inc. (NYSE: TXT) has followed a similar path to Northrop Grumman in recovering from the economic recession as demand for the company's Shadow UAVs.

On January 4 Textron subsidiary AAI Corp., received a $39 million production order for additional Shadow Tactical Unmanned Aircraft Systems (TUAS). In total, 116 Shadow TUAS have been ordered by the military and the new production order will include two new units for the U.S. Army and one for the Marine Corps.

"With so many Shadow systems in the field and more than 460,000 flight hours amassed, we're witnessing an incredible evolution in mission capabilities," says AAI Vice President of Unmanned Aircraft Systems Steven Reid.

Textron shares reached a new 12- month high on Monday closing up $1.09 at $21.47, and have increased more than five-fold since bottoming out in March 2009.

Boeing's (NYSE: BA) wholly owned subsidiary Insitu Inc.'s ScanEagle and NightEagle UAVs are set to integrate L-3 Communications (NYSE: LLL) technology into its systems that will enable digital data link.

The L-3 system known as Bandit will advance the capability of Insitu's UAVs to allow ground forces to see real-time data stream from using small laptop devices.

The Bandit technology will be available on the latest next-generation UAV due for commercial release in the third quarter of 2010, the Integrator.

"Integrator was specifically designed to integrate new payloads quickly. The modular design of the aircraft, supported by our open system architecture, allowed our team to successfully integrate the L-3 Bandit radio in just a few days," said Insitu Vice President of Emerging Programs Bill Clark.

Shares of L-3 Communications have rebounded from a $57.09 bottom in March 2009 and are currently trading at $88.88, while Boeing has more than doubled since that time to $61.01 from a bottom of $29.39. Boeing relies less on its UAV sector as most of the company’s revenue is generated from its commercial jetliner business.

AeroVironment Inc. (Nasdaq: AVAV) is another company working in the UAV industry. The company focuses on small, hand-launched unmanned aircraft system and does not directly compete with makers of large UAV's like Boeing, General Atomic, Northrop Grumman and Textron. AeroVironment works to deliver UAV that provide direct information to front-line ground forces and that are hand launched and controlled. The company does consider the larger companies to possibly become its direct competitors in the future.

Shares of AeroVironment are up over 50 percent since March 2009 when it fell off a cliff during the economic recession. Current trading for the stock has shares valued at $31.70, up 10 percent since the end of the year.

Elbit Systems LTD. (Nasdaq: ESLT) is another maker of small UAVs and its shares saw a very strong 2009. Shares for the company have climbed steadily, and were not impacted as hard by the recession as other companies.

For the first nine months of 2009, Elbit's revenue from airborne systems increased by 24.2 percent to $513.3 million from $474.5 in the same period the year prior.

"We continued our strategic process of enhancing our R&D activities, in order to bring to market a broad range of mature and operationally ready products and systems," commented Joseph Ackerman, President and CEO of Elbit Systems. "This was in response to market demand for mature products and systems allowing for rapid deployment. We are seeing the fruits of our previous investments, which are strengthening our competitive position in our areas of activities."

Current movement on shares of Elbit has the stock at $64.20, up over 50 percent since March 2009.

Companies in this sector have a common trend of moving upward since many of them bottomed at the height of the recession. Investors that got in on the shares at that point are smiling, but with the promotion of UAVs by Senators and defense officials in recent weeks have created the opportunity for another spike.

As UAV companies continue to expand and find new applications for the products expect more money to be pouring in.

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