Drones Give Wings to These 3 Stocks - Analyst Blog

Drones are Unmanned Aerial Vehicles (UAVs) that are controlled by pilots from the ground, or are pre-programmed to execute specific missions. These unmanned flying robots are now scripting aviation history by taking the pilot out of the cockpit and performing actions that look straight out of science fiction.

Drones vary greatly in size – some as massive as jumbo jets, while others could fit in a child's palm. With applications ranging from surveillance to targeted murder, agriculture to pizza delivery, and extreme photography to rescue operations, the drone technology is still in an experimental nascent stage.

Industry Usage

The popularity of drones in the military stands to reason, as they are equipped with the wherewithal for espionage, combat and support roles in warfare. Their usage curbs casualties of war and loss of personnel during battle, making it the most potent weapon in the modern military warfare. However, the scope of this cutting-edge technology has implications that reach far beyond that.

Military drone manufacturers are pulling out all stops in their attempts to cash-in on this new technology, as they delve into putting remote-sensing drones to commercial use. In Japan, the radio-controlled RMAX helicopter drones have been spraying crops with fertilizers and pesticides for 20 years. South Korea has been using the helicopters for five years now. Australian television networks utilize drones to cover cricket matches. The United Arab Emirates is experimenting with the use of small drones to deliver government documents.

In the United Kingdom, real estate agents use drones to capture aerial footage of expensive properties, and energy companies employ them to check the undersides of oil platforms for corrosion and upkeep. Last June, a Domino's Pizza DPZ franchisee in the U.K. uploaded a video on Google Inc.'s GOOG YouTube of a "DomiCopter" drone flying over the countryside to deliver two pizzas in a publicity stunt. The Pentagon is also promoting research and development in underwater drones, which can engage in oceanic warfare and thus have huge implications for the oil and gas industry.

The Dangers of Safety

Drones perhaps have the greatest ramifications in the surveillance field. Even as law enforcement keeps emphasizing that it uses drones to strengthen its security measures, skeptics raise the increasing probability of violation of civil liberties. Privacy laws have not yet been able to ensure that their usage will be in keeping with democratic values.

The Federal Aviation Authority FAA is working on drone regulations and, so far, has been trying to restrict commercial usage of drones, citing concerns for the safety of airspace. But drone manufacturers, the rising stars of the defense industry, are raring to capitalize on the economic potential of this fledgling technology. Here we outline 5 stocks that we believe might turn out to be stalwarts in this field.

The Top Picks

Northrop Grumman Corp. NOC, a leading defense supplier, recently won a $36.3 million contract from the U.S. Army for Hunter drone engineering work. Its high-altitude aircraft, Global Hawk, has the wingspan of a jetliner. According to Bloomberg, the company sold drones valued at $1.2 billion to South Korea late last year, and is spreading its drone business in the Asia-Pacific area.

Northrop Grumman has fetched a return of over 66% over the past year. This Zacks Rank #2 (Buy) stock is currently trading at a forward P/E of 13.5x with a long-term earnings expectation of 7.7%.

AeroVironment, Inc. AVAV is the creator of the "Nano Hummingbird," a drone weighing less than an AA battery. The deceptively named device has the potential to turn a new leaf in surveillance capabilities in urban environments. AeroVironment, the top supplier of small hand-launched drones to the U.S. military, sports a Zacks Rank #2.

Its share price has appreciated a massive 100% in the past year. The stock is currently trading at a forward P/E of 77.9x with a long-term earnings expectation of 22.0%.

Facebook, Inc. FB, the social network giant, plans to employ a fleet of solar-powered drones to provide Internet access to remote areas of the world, and is actively recruiting a team of experts to make its vision a reality. Floating in the stratosphere, the drones will use “free-space optical communication” to provide two-thirds of the world with net coverage. Facebook currently sports a Zacks Rank #2, and this ambitious new venture looks set to expand the company's operations even further.

Facebook has returned 112% to shareholders by way of price appreciation over the past year. The stock is currently trading at a forward P/E of 56.5x with a long-term earnings expectation of 31.5%.

Flight to the Future

Sequestration, an ill-omened word in defense circles, may just turn out to be a blessing in disguise for the UAV industry. With lesser logistics requirements and much greater flexibility, drones can reduce operating costs and provide equipment and supplies to troops in a battlefield.

Whether we like it or not, these aerial robots are changing the face of aviation. The FAA might drag its feet in defining the regulation for commercial drones, but the industry is all geared up and eager to take flight. For these birds, the sky is the limit.