In a turbulent day for the markets, two American-listed companies, a drone manufacturer, and a water provider stood out with strong performances. AeroVironment (NASDAQ:AVAV), headquartered in Virginia, specializes in unmanned aircraft systems (UAS), Tactical Missile Systems (TMS), and unmanned ground vehicles (UGV), primarily catering to the U.S. Department of Defense, federal agencies, and international governments.
On the other hand, Consolidated Water (NASDAQ:CWCO), based in the Cayman Islands, focuses on selling desalinated potable water from seawater to end users in the Caribbean through reverse osmosis technology. The company boasts 11 water production plants in the Caribbean capable of producing 25.5 million gallons of water daily and 27 water treatment plants in the U.S. with a capacity to treat 52.5 million gallons per day.
On a recent down day in the market, AVAV saw a remarkable gain of over 20%, accumulating a 37% increase in its year-to-date performance. CWCO, too, had a good day, with a nearly 6% increase in its stock value, and an impressive 101% year-to-date growth.
While both companies possess intriguing business models, Consolidated Water, despite being just a fraction of the market cap of AVAV, emerges as a stronger investment option, and not solely due to its balance sheet.
Taking a Closer Look at the Balance Sheets
Salman Ahmed, the Global Head of Macro and Strategic Asset Allocation at Fidelity International, recently expressed concerns about a potential U.S. recession in 2024, attributed to corporate debt refinancing over the coming six months. Borrowers currently enjoy the cushion of locked interest rates, but this is a temporary situation. Companies that once financed at low rates will soon face significantly higher interest costs, leading to a substantial shock.
This underscores the importance of scrutinizing the balance sheets of companies in your portfolio. Only those with robust balance sheets will weather the storm of corporate refinancing unscathed.
Comparing AVAV and CWCO in terms of interest coverage, Barchart data reveals that AVAV’s interest coverage ratio is -19.10x, while CWCO’s stands at a robust 195.8x, making it ten times stronger. Interest coverage is calculated by dividing EBIT (earnings before interest and taxes) by interest expenses, and a higher ratio is more favorable.
In the trailing 12 months, AVAV reported EBIT of $54.1 million with $9.2 million in interest expenses, resulting in an interest coverage ratio of -5.9x, a stark contrast to Barchart’s figure of -19.1x. Using S&P Global Intelligence data, AVAV’s trailing 12-month figures through July 29 yield an interest coverage ratio of 4.9x.
CWCO’s trailing 12-month EBIT is $18.5 million, with interest expenses of $0.3 million after accounting for investment income. This translates to an interest coverage ratio of 62.7x, lower than the Barchart figure but significantly higher than AVAV’s.
Looking at the most recent quarter, Consolidated Water boasts a net cash position of $45.3 million on its balance sheet, whereas AeroVironment carries a net debt of $50.4 million. Though seemingly marginal, this difference could prove crucial in securing solvency in the face of adversity.
Valuation Metrics Offer Further Insights
When assessing enterprise value (EV) metrics, Consolidated Water’s EV of $394.7 million stands at 3.02x its sales and 21.2x its EBIT. In contrast, AeroVironment’s EV amounts to $2.54 billion, with EV/sales and EV/EBIT ratios of 4.70x and 115.3x, respectively. Based on these ratios, CWCO appears to be the more reasonably priced stock, despite its impressive performance in 2023.
While only a limited number of analysts cover AVAV and CWCO, they unanimously rate both as Strong Buys. AVAV receives a rating of 4.5 out of 5, while CWCO garners a perfect score of 5 out of 5. This consensus among analysts may signal further growth potential for these companies.
In the most recent quarter, Consolidated Water reported revenue of $44.2 million, marking a 110% increase compared to the previous year, accompanied by a remarkable 178% rise in net income from continuing operations. CEO Rick McTaggart highlighted the company’s entry into the U.S. desalination market with a $204 million contract to build and operate a seawater desalination plant in Hawaii, emphasizing their expertise in energy-efficient desalination technology.
Consolidated Water, with a 50-year track record, might seem overlooked by investors due to its small-cap status. However, given the global significance of water resources, it’s unwise to underestimate CWCO’s potential.
As for AeroVironment, its Q1 2024 results, released on September 5, showcased impressive growth, with a 40% increase in revenue to $152.3 million and operating income of $26.4 million, a significant improvement over the $3.3 million loss from the previous year. The company also boasted a record-funded backlog of $540 million, a 27% increase from Q4 2023.
Given the increasing use of drones, particularly in conflicts like the Ukraine/Russia War, AVAV’s appeal is evident, as drones are likely to play a pivotal role in future warfare.
Both AVAV and CWCO have been publicly traded for a substantial period, with AVAV since 2007 and CWCO since 2006. While they may not have set the market on fire since their IPOs, their compelling stories in 2023 make CWCO the preferred choice for investment, not solely due to its robust balance sheet.
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