AeroVironment (AVAV): Drones to electric cars

California-based AeroVironment (AVAV) provides small cap investors with two investment angles to play a potential infrastructure boom.

The company is a defense contractor - yet it has a growing green technology business that could provide a platform for future expansion.

AeroVironment's primary business, until recently, has been selling unmanned aircraft systems, also known as remote-controlled drones. Since 1986 the company has sold these drones to the U.S. military and its allies.

The mini-aircraft help the military gather reconnaissance data from the battlegrounds of Afghanistan and Iraq, and also help in monitoring forest fires and volcanic eruptions.

They also provide surveillance to make sure pipelines aren't leaking, and help authorities patrol the porous U.S. borders for illegal activities.

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AeroVironment's Raven, with a five-foot wingspan, weighs about four pounds, and troops on the battlefield can launch them by hand.

The stock has been pushed higher because the company is now supplying the guts of electric vehicle charging stations. In the company's fiscal year that ended last April, this business accounted for about 10 percent of revenue.

AeroVironment was selected to build up to 100 electric vehicle fueling stations in seven cities in South Carolina.

The company is also part of the rollout of the Nissan Leaf, the first commercially available car powered entirely by electricity, and is working on the residential infrastructure needed to make the all-electric models practical.

NRG Energy picked AeroVironment in November 2010 to build the first privately funded electric charging system for Houston.

In San Francisco, the Bay Area Air Quality Management District recently awarded AeroVironment $350,000, part of a $3.9 million effort to spread the build-out of electric vehicle charging stations.

Thanks to its military contracts, AeroVironment remained profitable through the recession, and posted a $20.7 million profit in the last fiscal year.

And while the military has scaled back the Raven program, the U.S. Army did place a $46.2 million order in December, and a $7.8 million upgrade order in January.

For fiscal year 2011 analysts expect flat earnings, and 13 percent revenue growth to $282 million. But growth could be faster if the electric vehicle movement catches on.

Right now electric charging systems account for just a fraction of the company's overall business. I consider AeroVironment a bargain with limited downside.