AeroVironment's shares jump on statement about Space Force deal

After its shares went through a wild swing on Monday following a report that its $1.4 billion contract with the United States Space Force could be threatened, drone manufacturer AeroVironment, Inc. (AVAV) released a statement on Tuesday addressing its deal with the military, saying that it remains in "active negotiations" with Space Force.

Shares of AVAV surged 9.5% after the company released its statement.

The company's stock soared over 20% shortly after the morning bell on Monday, riding a rally that sent shares for companies in the defense and drone sectors higher after the US and Israel launched its war on Iran.

But an article published on Monday by SpaceNews, a publication covering the aerospace industry, reported that the US Space Force is reopening a $1.4 billion program to build mobile ground stations that are used to track and command spacecraft.

The program, known as the Satellite Communications Augmentation Resource (SCAR), operates under the Space Rapid Capabilities Office, or Space RCO.

The contract had initially been awarded to defense contractor BlueHalo, which AeroVironment acquired last year.

Under the agreement, BlueHalo is expected to produce about 12 ground terminals called Broad Area Deployable Ground Terminal Enabling Resilient (BADGER) communications. According to SpaceNews, no BADGER units have been delivered to date for the SCAR program.

The report sent AVAV shares tumbling 17% after its initial rally on Monday.

In its statement on Tuesday, AV said that it "appreciates that the contract was temporarily paused while both parties work together on a firm-fixed-price contract that provides a commercialized product solution with an expedited delivery timeline."

SpaceNews noted that "the decision to reopen bidding on the program reflects a broader effort by the Defense Department to diversify suppliers and reduce dependence on bespoke systems that are costly to produce."'

AV ramps up manufacturing capacity

In what might've been a case of very fortuitous timing, AV announced on Tuesday that it was investing $30 million as part of a significant expansion of its manufacturing operations in Albuquerque, New Mexico.

“This expansion comes as the federal government continues to emphasize the importance of defense contractors leaning forward, investing in domestic facilities, resilient supply chains, and skilled workforces that can deliver critical capabilities at scale, on time, and cost-effectively,” Church Hutton, chief growth officer at AV, said in a statement.

“AV’s Albuquerque growth reflects this national priority and positions the company to meet accelerating demand across defense, aerospace, and space markets.”

The company pointed to this expansion of its New Mexico facility in its statement about the Space Force contract, noting that it will "support growth in our Space and Directed Energy platforms, including manufacturing for the SCAR program."

"AV’s innovation and ability to scale ahead of manufacturing remains a key differentiator, giving us a competitive edge in the broader defense market," it said. "AV is confident in its ability to successfully deliver our systems ahead of competitors."

BTIG analyst Andre Madrid reiterated his Buy rating on AVAV shares in a client note on Monday, calling the intraday pullback on the stock “overdone for a contract that was initially expected to make up ~6% of annual sales."

On Tuesday, Stifel analyst Jonathan Siegmann echoed these sentiments while reiterating a Buy rating on AV's shares.

"The introduction of a competitor on this program is a new negative," Siegmann wrote in his client note. "Stock reaction appears to us as excessive, however."

He added that while "it's a large portion of AVAV's unfunded backlog (nearly half), the SCAR program is expected to ramp to no more than 10-12% of AVAV's revenues and earnings next year."