Investing.com -- AeroVironment (NASDAQ:AVAV) Inc. saw its shares surge almost 9% Wednesday after securing a nearly $1 billion contract from the U.S. Army, a move that led Baird analysts to upgrade the stock.
The contract, valued at $990 million, is set to provide "an organic, stand-off capability to dismounted infantry formations," specifically the SwitchBlade drone, which offers dismounted infantry units the capability of "destroying tanks, light armored vehicles, hardened targets, defilade and personnel targets."
Baird explains in its note that the contract, which extends through August 2029, ensures significant visibility for AeroVironment's revenue stream over the next five years.
The firm's analysts quickly responded to the news by upgrading AeroVironment to Outperform from Neutral, citing the record contract as a key driver of future growth.
They highlighted that this award "locks in visibility" for the company's loitering munition systems (LMS) segment through FY29, easing investor concerns about potential revenue shortfalls beyond FY25.
The analysts now project substantial growth for AeroVironment's SwitchBlade product, with LMS revenues expected to rise significantly over the next few years.
Specifically, Baird revised their estimates for the company's LMS revenues, forecasting $405 million, $550 million, and $650 million in FY25, FY26, and FY27, respectively.
This represents a sharp increase from previous estimates, underscoring the contract's importance. Additionally, they raised AeroVironment's price target to $220, up from $161, reflecting the newfound confidence in the company's growth trajectory.
The upgrade also takes into account AeroVironment's expected expansion in production capacity. The company plans to boost its annual manufacturing output of the SwitchBlade to $1 billion by FY27, ensuring it can meet the growing demand.
Baird concludes that AeroVironment's premium valuation is now justified and that the company is "still cheaper than peak valuation in early 2024."