AeroVironment trades at $181.01 per share and has stayed right on track with the overall market, losing 6.3% over the last six months while the S&P 500 is down 1.9%. This was partly driven by its softer quarterly results and might have investors contemplating their next move.

Is now the time to buy AeroVironment, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.

Why Is AeroVironment Not Exciting?

Despite the more favorable entry price, we're sitting this one out for now. Here are three reasons why there are better opportunities than AVAV and a stock we'd rather own.

1. Shrinking Operating Margin

Operating margin is one of the best measures of profitability because it tells us how much money a company takes home after procuring and manufacturing its products, marketing and selling those products, and most importantly, keeping them relevant through research and development.

Analyzing the trend in its profitability, AeroVironment’s operating margin decreased by 7.5 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. AeroVironment’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers. Its operating margin for the trailing 12 months was 4.4%.

2. Free Cash Flow Margin Dropping

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

As you can see below, AeroVironment’s margin dropped by 24.6 percentage points over the last five years. Almost any movement in the wrong direction is undesirable because of its already low cash conversion. If the trend continues, it could signal it’s becoming a more capital-intensive business. AeroVironment’s free cash flow margin for the trailing 12 months was negative 4.9%.

3. New Investments Fail to Bear Fruit as ROIC Declines

ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, AeroVironment’s ROIC has unfortunately decreased significantly. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.