Drone Companies that are off the beaten path

[Saluki]

 

 

It's surprise to anyone except the generals in the military that the current war is always being fought with the prior war's tactics, and the first to adapt to the new reality has an advantage. The Civil War was fought with muskets, but the invention of Colt's multi shot revolvers and better rifling, made small fighting forces and snipers more effective which altered the tactics. World War I initially was fought with Calvary, but trenches and machine guns changed the tactics quickly for all future battles.  WWII started with trenches and the Maginot Line, but the Tank had already been invented and "shock and awe" was quickly the new paradigm. The Russians still relied on Tanks, artillery and naval superiority in Ukraine, but inexpensive drones providing real time intelligence, and even improvised sea drones quickly brought the war to a standstill against a much larger force.  Maybe the next war will be all cyber attacks, but drones seem to be what is working now.  

 

The above video shows a DARPA prototype by Northrup Grumman that is very interesting.  Instead of patrol ships in the Red Sea waiting to find Houthi or Somali Pirates in the middle of an attack, what if it was in sleep mode nearby until activated by a 911 beacon and it could be in the fight in hours instead of days? So my question is, besides the BIG contractors, like Northrup which will benefit, but it will be a small part of a larger operation and won't move the needle, can you think of some smaller companies that will benefit from this? 

 

For example, I own some Taylor Devices because I was impressed with the potential of their structural inertial dampers (giant earthquake shock absorbers for buildings) and the growth they exhibited, I thought it would have more growth because of insurance companies who are refusing to do business in some states from rising losses. The devices can prevent earthquake damage.  However, that business shrunk last quarter but was more than made up by their aerospace segment, which producers shock absorbers for Predator drones. I noticed that Kraken Robotics (which is pricey but high growth) makes batteries for undersea subs made by others, but used in the oil and gas industry. Could these be useful in sea drones?  Ondas is a company that has FCC frequencies that Railroads can use for reliability communications (like what Anterix uses for Utilities), and they also have an unusual tech that is a flying drone that throws a net on other drones, so you can capture it without destroying it (for intelligence or reuse?).  Is this a viable military application? Is anyone else working on drone vs drone tech? 

 

So my question is do you know of any smaller cap companies that supply parts, equipment, or software for bigger defense contractors doing things like air or sea drones, or cybersecurity?  Palantir is an obvious name in intelligence and the big players like Amazon and MSFT are fighting over cloud contracts, but there has to be other smaller suppliers that are feeding into those use cases.  Olin makes ammunition for the army, but it's over $6bln so they won't see much benefit even if there are twice as many wars. So something in the $1Bln or less market cap would be interesting.  Any ideas? 

 

[Saluki]

Droneshield is a $475mm market cap Australian company in the drone market.  It's 8x sales, so it's probably just in the watch pile, but I'll add the name here in case I find more names and maybe one of them will be interesting enough to start a separate post. 

[Saluki]

Teledyne's imaging business is about 55% of revenues, but it's declining.   They have a drone business that is growing 30% a year, but it's one of those great businesses that is stuck inside a terrible business.  It doesn't look like a bargain, and if it was, you would think you'd be able to find at least one insider who was buying, instead of cashing in and selling out their shares as soon as they get them: 

 

TDY - Teledyne Technologies Inc - SEC Form 4 Insider Trading Screener - OpenInsider

 

Teledyne Technologies Incorporated (NYSE:TDY) Q1 2024 Earnings Call Transcript (yahoo.com)

 

Cool drones though  

 

 

[Spekulatius]

On 5/10/2024 at 11:56 AM, Saluki said:

 

 

It's surprise to anyone except the generals in the military that the current war is always being fought with the prior war's tactics, and the first to adapt to the new reality has an advantage. The Civil War was fought with muskets, but the invention of Colt's multi shot revolvers and better rifling, made small fighting forces and snipers more effective which altered the tactics. World War I initially was fought with Calvary, but trenches and machine guns changed the tactics quickly for all future battles.  WWII started with trenches and the Maginot Line, but the Tank had already been invented and "shock and awe" was quickly the new paradigm. The Russians still relied on Tanks, artillery and naval superiority in Ukraine, but inexpensive drones providing real time intelligence, and even improvised sea drones quickly brought the war to a standstill against a much larger force.  Maybe the next war will be all cyber attacks, but drones seem to be what is working now.  

 

The above video shows a DARPA prototype by Northrup Grumman that is very interesting.  Instead of patrol ships in the Red Sea waiting to find Houthi or Somali Pirates in the middle of an attack, what if it was in sleep mode nearby until activated by a 911 beacon and it could be in the fight in hours instead of days? So my question is, besides the BIG contractors, like Northrup which will benefit, but it will be a small part of a larger operation and won't move the needle, can you think of some smaller companies that will benefit from this? 

 

For example, I own some Taylor Devices because I was impressed with the potential of their structural inertial dampers (giant earthquake shock absorbers for buildings) and the growth they exhibited, I thought it would have more growth because of insurance companies who are refusing to do business in some states from rising losses. The devices can prevent earthquake damage.  However, that business shrunk last quarter but was more than made up by their aerospace segment, which producers shock absorbers for Predator drones. I noticed that Kraken Robotics (which is pricey but high growth) makes batteries for undersea subs made by others, but used in the oil and gas industry. Could these be useful in sea drones?  Ondas is a company that has FCC frequencies that Railroads can use for reliability communications (like what Anterix uses for Utilities), and they also have an unusual tech that is a flying drone that throws a net on other drones, so you can capture it without destroying it (for intelligence or reuse?).  Is this a viable military application? Is anyone else working on drone vs drone tech? 

 

So my question is do you know of any smaller cap companies that supply parts, equipment, or software for bigger defense contractors doing things like air or sea drones, or cybersecurity?  Palantir is an obvious name in intelligence and the big players like Amazon and MSFT are fighting over cloud contracts, but there has to be other smaller suppliers that are feeding into those use cases.  Olin makes ammunition for the army, but it's over $6bln so they won't see much benefit even if there are twice as many wars. So something in the $1Bln or less market cap would be interesting.  Any ideas? 

 

Thats just a B2 that is swimming.

[Saluki]

Kratos is a drone company I looked at this weekend.  US based and has US military contracts, like the big boys.  I think it's trading at a ridiculously high valuation, but part of that value is probably that people think it will eventually get swallowed up by one of the major defense contractors like Raytheon.  

 

And since it's in the US, it's probably limited in who it can sell drones too without the government's permission.  DroneShield is an Australian company and they make a counter-drone jammer device, but since it's not in the US, they probably have more people that they can sell their tech too without government interference.  Unfortunately, it's trading at too high a price for my taste also. 

[Saluki]

Yesterday, I saw this company jumped 80%, and I wasn't familiar with it, so I checked it out. I don't care enough about it to start a post, but I guess here is a good place to put it.

 

Ocean Power Technologies, Inc. (OPTT) Stock Price, News, Quote & History - Yahoo Finance

 

 

 

OPTT is Ocean Power Technologies, and they are a nano cap that reminds me of Kraken Robotics, but their tech isn't as good and they aren't profitable.  They make stuff for the oil and gas industry, and some of it has applicability to defense, which is why Teledyne Marine signed a deal with them.  They also announced some deals with an unnamed US government agency. It was curious that they announced several deals but didn't mention any dollar amount.  After some more digging, it looks like they are in a fight with an activist investor who says that OPTT is in financial trouble and they are refusing to let the investor, Paragon, do a non dilutive preferred investment, and are instead trying to pump up the stock price and issue shares to dilute everyone. 

 

Besides the drone stuff which they sold to the UAE, and looks amateurish, they also have some buoy that generates electricity from the sea movement, and it's all over their website.  The problem with that wave electricity generation is that it's usually not feasible.  It tends to be expensive and usually gets damaged in storms.  It looks like they tried to partner with a big company to develop/license it but they walked away because it wasn't feasible either. This stuff would be an interesting green tech (and more reliable than wind generation) if someone could actually make it work and produce electricity at a price that makes it competitive with wind/solar.  Maybe someone will figure it out, but I don't think it will these guys. 

I think with AI the easy money has already been made in places like NVDA, and in drones the same is true about defense contractors.  But I'm still convinced that if you keep turning over stones you will find things in related industries that will benefit and are off the beaten path so they aren't noticed by the crowd.  I don't think OPTT is one of those, but I'll keep turning over stones and eventually something will come up.  

 

(I have about a 1.5% each in Taylor Devices and Kraken Robotics, which are adjacent to companies that make drones, and I plan to hold them for a few years and let them compound quietly in the shadows, adding on the dips when I can.)

[formthirteen]

On 5/29/2024 at 11:59 PM, Saluki said:

Teledyne's imaging business is about 55% of revenues, but it's declining.   They have a drone business that is growing 30% a year, but it's one of those great businesses that is stuck inside a terrible business.  It doesn't look like a bargain, and if it was, you would think you'd be able to find at least one insider who was buying, instead of cashing in and selling out their shares as soon as they get them: 

 

Teledyne also owns Universal Robots A/S which builds "cobots":

https://en.wikipedia.org/wiki/Universal_Robots

 

 

[Saluki]

I stumbled on this one, Red Cat Holdings which has 3X its stock price in a year. 

 

https://finance.yahoo.com/news/red-cat-holdings-reports-financial-203000988.html

 

And this is why it's hard to invest in a hot industry.  Cash way down, receivables way up and the stock goes parabolic because of the revenue increase. 

[Saluki]

 

Here is a guy talking up RedCat.  This came out after my post. 

 

The thesis is that RedCat is one of the finalists for a military contract.  If it's a binary outcome like that, options would probably be a better idea, but this is not a big company, so it will tough to play it.  And since it's up 3-4X in less than a year, good luck finding someone to sell you one that isn't outrageously priced based on the volatility. 

 

Also, if they don't get the military contract, you are stuck owning a company that you overpaid for because it was pumped on Twitter, and they are late filing their 10-K, so it's questionable if you can trust them. 

 

Moreover, even if they get a military contract, the thesis is built on profitability if they can use that contract to borrow money to build a new factory, which will help them produce a larger quantity of drones and lower costs through economies of scale.  

 

If that contract doesn't come through, or if does and the new massive capex doesn't solve all their problems, then you're only catalyst is to hope that you get acquired by a larger defense contractor.  Too hard pile. 

[Morgan]

@Saluki thank you for continuing to post here. Lots of interesting stuff to review. Thank you! 

[Spekulatius]

Getting a contract and completing it profitably are not the same thing, especially with a company that does it have strong accounting as the late 10-k indicates. This is not for the faint of the heart.

Edited September 6 by Spekulatius

[Fitz]

There is AeroVironment ( AVAV ) they are a pure play on drones. They have been way to expensive since the Ukraine war but I got to take a tour of their facility about a year ago and they have interesting products. They have drones and carry other little drones that can fly through a window and around building to hit a target. Pretty cool stuff. They ship a ton of stuff to Ukraine and now Taiwan.