While the markets struggled in Wednesday trading, a drone company and a water business were two U.S.-listed stocks that did well on this down day.
Virginia-based AeroVironment (AVAV) manufactures unmanned aircraft systems (UAS), tactical missile systems (TMS), and unmanned ground vehicles (UGV). Its primary customers are the U.S. Department of Defense, other federal agencies, and international governments.
Consolidated Water (CWCO) is a Cayman Island-based water company. It sells potable water from seawater to end users in the Caribbean. The water has been desalinated using reverse osmosis technology.
It has 11 water production plants in the Caribbean that can produce 25.5 million gallons of water daily. It owns 27 water treatment plants in the U.S., which can treat 52.5 million gallons per day.
AVAV was up more than 20% in Wednesday trading and 37% year-to-date. CWCO was up nearly 6% on the day and 101% YTD.
While both companies have interesting businesses, despite being one-seventh of the market cap of AVAV, Consolidated Water is the better investment, not just because of its balance sheet.
What About the Balance Sheet
Fidelity International Global Head of Macro and Strategic Asset Allocation, Salman Ahmed, recently stated that he expects the U.S. to enter a recession in 2024 due to corporate debt refinancings over the next six months.
“Borrowers are not feeling the full pressure of the interest rate because they are sitting on locked rates, which is not a permanent phenomenon,” Yahoo Finance reported his comments. “A company which financed itself at 2, 3, 4% will be financing at 10, 11, 12% now. That’s a huge shock.”
Indeed it is.
If you’re not taking a closer look at the companies' balance sheets in your portfolio, you’re doing yourself a significant disservice. Only the most robust balance sheets will pass through corporate refinancing relatively unscathed.
So, let’s consider these two companies.
The Interest Coverage Tells Part of the Tale
According to Barchart data, AeroVironment’s interest coverage is -19.10x, while Consolidated Water’s is 195.8x, or 10x better. The interest coverage is calculated by dividing EBIT (earnings before interest and taxes) by the interest expense. The higher the interest coverage ratio, the better.
In the trailing 12 months, AVAV’s EBIT was $54.1 million with $9.2 million in interest expense for an interest coverage ratio of -5.9x. That’s a big difference from the Barchart figure of -19.1x.
However, according to the interest coverage figure on the stocks advancing page, it is calculated as follows:
Annual pre-tax income + annual interest expense divided by annual interest expense.
Using data from S&P Global Intelligence, I’ll substitute AVAV’s trailing 12-month figures through July 29. I get $54.1 million + -$9.2 million divided by -$9.2 million for an interest coverage ratio of 4.9x.
CWCO's trailing 12-month EBIT is $18.5 million, while its interest expense is $0.3 million after accounting for investment income. Based on the calculation above, its interest coverage ratio is 62.7x, which is also lower than the Barchart figure but much higher than AVAV.
So, at the end of each company’s most recent quarter, Consolidated Water had net cash of $45.3 million on its balance sheet, compared to net debt of $50.4 million for AeroVironment.
It might not seem like a lot, but it could be the difference between Chapter 11 and solvency someday.
The Valuations Tell Another
Consolidated Water has an enterprise value (EV) of $394.7 million. Its EV is 3.02x its sales and 21.2x EBIT. AeroVironment’s EV is $2.54 billion. Its EV is 4.70x sales and 115.3x EBIT.
By these two ratios, CWCO is the more reasonably priced stock despite doubling in 2023.
While only six analysts cover AVAV according to Barchart data, and just two for CWCO, they’re both Strong Buys -- AVAV is 4.5 out of 5, while CWCO is 5 out of 5 -- so if you’re interested in either of the stocks, you’ll want to continue to follow if other analysts join the party.
That’s usually a sign a company’s ready for some more growth.
In the most recent quarter, Consolidated Water reported revenue of $44.2 million, 110% higher than a year earlier, with a 178% increase in net income from continuing operations.
“In July, we entered the U.S. desalination market for the first time with a $204 million contract to design, build, operate and maintain a seawater desalination plant in Hawaii. We believe winning this contract was due to our proven ability in designing, building and operating some of the world’s most energy-efficient seawater desalination plants,” stated CEO Rick McTaggart.
Consolidated Water has existed for 50 years, so I can see why many investors ignore this small-cap stock. However, water is one of the world’s most significant issues, so you should never count CWCO out.
As for AeroVironment, it reported Q1 2024 results on Sept. 5. Its top line grew 40% to $152.3 million, while its operating income was $26.4 million, a much better result than its $3.3 million loss a year earlier. It finished the quarter with a record funded backlog of $540 million, 27% higher than Q4 2023.
With all the drone use in the Ukraine/Russia War, I can see the attraction to AVAV. Drones will probably be the only weapons in future wars.
There’s no question that AeroVironment has some desirable qualities. The same can be said for Consolidated Water. They both have been public companies for a long time -- AVAV since 2007, CWCO since 2006 -- so they haven’t exactly lit the world on fire since their IPOs.
That said, both have interesting stories to tell in 2023; I think CWCO is the better buy, not just because of the balance sheet.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
