UAV Stocks Take to the Skies
By Steve Christ
As the military continues to battle over who will control the promising future of unmanned aerial vehicles (UAVs), the demand for them on the battlefield grows.
Their ability to provide unmatched reconnaissance and now even more firepower has boosted their appeal to both the boots on the ground and flyboys back at the safety of the base.
That means that now and in the future, billions of dollars will be spent on current and new UAV programs, making them the most dynamic growth sector in the aerospace industry.
In fact, a recent study by the Teal Group predicts that over the next ten years, worldwide spending on UAVs will likely triple. According to the group, close to $55 billion will be spent on these systems in the next ten years.
Spending the bulk of those billions, of course, will be none other than Uncle Sam.
According to the study, the U.S. will account for 77% of the worldwide research, development, testing and evaluation ("RDT&E") spending on UAV technology over the next decade, and about 64% of the procurement.
"The most significant catalyst to this market has been the enormous growth of interest in UAVs by the U.S. military, tied to the general trend toward information warfare and net-centric systems," said Teal senior analyst Steve Zaloga, one of the authors of the study. "UAVs are a key element in the intelligence, surveillance, and reconnaissance (ISR) portion of this revolution, and they are expanding into other missions as well with the advent of hunter-killer UAVs."
In all, the military plans to spend $11.6 billion from FY '07 through FY '11 to procure 322 UAVs.
Even Homeland Security is getting into the act. A 2007 appropriations bill--signed into law last fall by President Bush--provides $20 million to Customs and Border Protection for the acquisition of UAVs and related support systems. The bill also provides the Coast Guard with about $5 million for UAVs to help monitor the nation's borders.
At the receiving end of the bulk of this funding are defense heavyweights General Atomics and Northrup Grumman (NOC: NYSE), with both Honeywell (HON:NYSE) and Raytheon (RTN:NYSE) producing some of the vital components.
Privately held General Atomics produces the Predator, while Northrop manufactures the Global Hawk. Between them, they make up the bulk of the high-altitude, long-range UAVs that will shape the future. Of the four main UAVs in use, these currently hold the top spots in the Air Force.
The other two spots, however, are held by the smaller, portable UAVs favored by the grunts on the ground. They are the Shadow and the Raven, produced by two companies that are UAV pure plays.
The Raven is produced by a recent IPO called Aerovironment (AVAV:NASDAQ). With a weight of 4.2 pounds and a flight radius of roughly 6.2 miles, the Raven is the current state-of-the-art in small UAVs. In fact, it has quickly become a workhorse for the Army, with over 1,000 of them in use and even more on order.
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The California-based company also produces Swift, Puma, and Wasp UAVs, along with the Dragon Eye, favored by the Marines. And it makes the Global Observer, a new class of UAV that is liquid-hydrogen powered and operates in near space, i.e. the realm between airplanes and satellites.
The Shadow, on the other hand, is produced by AAI Corp., a subsidiary of United Industrial Corp.(UIC:NYSE). It's the follow-on to the Pioneer used during Desert Storm. Variants of the Shadow provide real-time targeting data to a growing arsenal of precision weapons.
These tactical UAVs are sold in sets costing $36 million, and they provide twelve hours of continuous battlefield surveillance. Since December 1999, when the U.S. Army selected AAI to be its prime tactical UAV contractor, the company has been awarded a series of annual production contracts now totaling 70 Shadow systems. Worldwide, Shadow systems have flown more than 33,900 missions in excess of 129,000 flight hours.
The Hunt Valley, Md.-based company also produces the "One System," which is the ground component of the program. Comprised of various monitoring stations and hardware, the system is designed to be interoperable with a whole host of tactical UAVs, including the Warrior produced by General Atomics.
Just last week the company received a $14.1 million contract to provide 266 additional One System remote video terminals (OSRVTs). The deal includes options for an additional 779 OSRVT production units and 199 mobile directional antenna systems with a total potential contract value of more than $60 million.
Taken together, these companies are the beneficiaries of a large portion of the growing spending on UAV procurements. As the skies in the battlefields of the future continue to change, these businesses will be right there, adding to their bottom lines every step of the way.
And if you don't look, you will never see them coming.
By the way....A stock that we talk about here quite often crushed it on the earnings side last quarter. Apple Inc. reported yesterday that its quarterly profit jumped 88% on the strength of increasing iPod and Macintosh sales. Sales were $5.26 billon vs. 4.36 billion last year, an increase of 21%. Music-related items accounted for 44% of those sales, proving once again that Apple is about alot more than just the Mac.
Wishing you happiness, health, and wealth,
Steve Christ, Editor