AeroVironment shares trade at $138.45, down 43% so far this year. The slide follows a securities class action over an accounting mistake the company disclosed in late June.
The mistake was an $89 million goodwill calculation error tied to AeroVironment’s space unit. It forced the company to revise financial results it had already reported. It also raised questions about the company’s financial controls while it was growing through acquisitions. The class action came afterward and is still pending.
A sector-wide drop
The restatement is the easy explanation for the decline, but it does not cover all of it. Kratos Defense & Security Solutions is down 45% this year, to $41.81, without restating anything. Red Cat has lost 23% and trades at $6.11.
The Defiance Drone and Modern Warfare ETF is up 0.9% on the year. The SPDR S&P 500 ETF is up 14%. The gap points to a sell-off in small and mid-cap defense names while the broader market kept rising, according to the 24/7 Wall St analysis in AOL. The question for shareholders is how much of the drop belongs to AeroVironment and how much to the group.
Bull and bear arguments
The bull case rests on two things. The error was an accounting problem, and customers still seem to be buying. AeroVironment holds a $117 million U.S. Defense Department contract to supply unmanned aircraft systems. After a fall of more than two fifths, the price already carries a lot of bad news.
The bears point out that restatements invite lawsuits, and a lawsuit can leave a discount on a stock long after the error is fixed. Kratos falling further without that trouble weakens any reading that blames only AeroVironment.
The analysts named a few things to watch: whether the class action settles or is dismissed, whether Kratos and Red Cat rebound, and whether new contract awards arrive at the pace the current valuation assumes. They also advised keeping position sizes modest given the open litigation.
