Although these will be Red Cat Holdings Inc.'s (RCAT:NASDAQ) first drones deployed specifically on behalf of Ukraine, the company is no stranger to government contracts, with an ongoing US$90 million deal already in place with U.S. Customs and Border Patrol (CBP).
The Puerto Rico-based firm has seen considerable growth over the past year as drone technology changes military dynamics. The Ukraine conflict has raised awareness of drone capabilities on the battlefield and seems to have increased defense spending across the West for the foreseeable future.
The Catalyst: A Big New Order
The new order encompasses some 200 FPV (first-person view) drones designed to allow Ukrainian drone pilots to engage in a coming counter-offensive against Russia. It's hoped that the drones will allow the Ukranians to probe Russia's hardened defenses for exploitable weaknesses.
"Russian forces really seemed to realize . . . that a lot of the terrain they had control over was going to be difficult to defend without entrenched positions," Brady Africk, an open-source intelligence researcher and analyst at the American Enterprise Institute who is tracking and mapping Russia's defensive buildup told The Financial Times.
ThinkEquity analyst Dr. Ashok Kumar reported, "Looking forward, ThinkEquity expects Red Cat's revenue and operating income to increase. The investment bank estimates revenue will reach US$11.9 million in FY23 and then more than triple to US$37 million in FY24."
The First-Person View (FPV) drones to be shipped have the highest power-to-weight ratio in the drone industry, offering increased maneuverability, especially when combined with their FPV functionality. They are designed to fly in GPS-denied and GPS-degraded battlefield conditions.
"Fortunately, Red Cat has the U.S. manufacturing capacity required to quickly deliver on such orders," said company CEO Jeff Thompson. "We are pleased to provide our product to Ukrainian drone pilots, and we look forward to continuing to engage with them, including by providing our new nighttime drone, the Teal 2. Much of drone activity is performed at night, and the Teal 2 is at the forefront of nighttime drone capabilities."
Officially launched last month, the Teal 2 is equipped with Teledyne FLIR's new Hadron 640R sensor, providing end-users with the highest resolution thermal imaging in a small form factor.
Other technology partners in the Teal 2 project include Athena AI, Reveal Technology, and Tomahawk Robotics.
Why This Sector? More Than Just Military Applications
Drone tech may dominate the battlefield, but that's not the only place remotely operated aerial vehicles are stirring up change.
In addition to shipping regular orders to CBP, Red Cat has signed on to provide two drones to the Bureau of Land Management for resource management and fire control coordination roles. That authorization includes another prospective fourteen purchases in the future for a total fleet size of 16.
Technical analyst Clive Maund wrote, "Red Cat has done well since it was recommended on the site on the 10 – 11th January."
Red Cat's Skypersonic division, which uses the company's drones to examine difficult or dangerous-to-reach infrastructure, should benefit from the US$1 trillion U.S. Federal Infrastructure Bill passed in 2021 that will create demand for drone inspection services across many civil improvement projects, including roads, bridges, and towers.
The company may also benefit from the United States' announcement of a US$300 million arms package for Ukraine, which was announced by The Guardian on May 31. This package includes air defense systems on top of ammunition.
The article noted, "The defense department said the latest shipments will bring the total value of U.S. security assistance to Ukraine to US$37.6 billion since Russia’s February 2022 launch of the invasion."
Why This Company? Scalable Supplier of Choice
While its diversification across civilian markets is a nice financial backstop, the company's increased entrenchment within U.S. military complex bodes well for additional large contract awards going forward, especially the SSR Tranche 2 program that is expected to be worth over US$300 million and is expected to be awarded within 12 months.
On March 20, ThinkEquity analyst Dr. Ashok Kumar reported, "Looking forward, ThinkEquity expects Red Cat's revenue and operating income to increase. The investment bank estimates revenue will reach US$11.9 million in FY23 and then more than triple to US$37 million in FY24."
"Revenue drivers include the infrastructure opportunity, current and future contracts with the [U.S.] Border Patrol and the Short Range Reconnaissance program," Kumar explained.
The firm finished building out its state-of-the-art facility in Salt Lake City, Utah, and invested US$U7 million in raw materials, drones in production, and more, which, Kumar wrote, "should support strong sales over 2023."
"Red Cat's current inventory of chips is big enough to build thousands of drones, and the company has the capacity to manufacture this many in a month. Now, with a developed and trained salesforce in place, Red Cat is continuing to build its sales pipeline."
"The company has a best-in-class drone that is getting positive response from the target markets: military and first responders," noted Kumar, "and should benefit from new and repeat orders over calendar 2023."
Why Now? Shipment Ready for Fleet-Sized Orders
With its production facility complete, the company is ready to scale as required to serve nation-level fleet contracts from buyers of all types. In addition, its novel 4-ship drone and software package allowing a single drone pilot to plan, launch, and execute missions with multiple drones, provides a significant advancement in drone applications, quadrupling the number of drones each certified operator can deploy.
The company is also anticipating the sale of its consumer division (consisting of subsidiaries Rotor Riot and Fat Shark) which should provide a nice bump to this year's bottom line.
On Feb 13, technical analyst Clive Maund wrote, "Red Cat has done well since it was recommended on the site on the 10 – 11th January, adding over 40% at one point a week ago, when it spiked dramatically higher on big volume. While I have not been able to get to the bottom of the reasons for that move, I believe it was due to the possibility of the company winning a big order from the government, and it makes sense that this should happen at some point, given the nature of the company's products."
"In any event," he opined, "this action certainly looks bullish, and it gives us an inkling of what is likely to happen if it really does win some big orders, as it seems inevitable at some point. From the standpoint of timing any new buying, this looks like a good point to buy or add to positions."
Streetwise Ownership Overview*Ownership and Share Structure
According to Red Cat, 37.27% of the stock is held by management and insiders. Reuters notes that CEO Jeff Thompson owns 22.88%, with 12.46 million shares. CEO of Fat Shark RC Vision Systems Gregory Ralph French has 7.40%, with 4.03 million. COO Allan Thomas Evans has 2.13%, with 1.16 million. Director Nicholas Liuzza has 1.48%, with 0.81 million. CFO Joseph Hernon has 0.86%, with 0.47 million. Ceo of Teal Drones, George Matus, has 0.60%, with 0.32 million, and Director Joseph Freedman has 0.40%, with 0.22 million.
9.01% is with institutional investors. The Vanguard Group Inc. has 2.34%, with 1.28 million shares. Pelion Venture Partners has 1.65%, with 0.90 million. BlackRock Institutional Trust has 0.62%, with 0.34 million, and Geode Capital Management LLC has 0.50%, with 0.27 million.
The rest is in retail.
The company had US$32.9 million in cash holdings as of 10/30/22
Red Cat Holdings has a market cap of US$65 million, with 54,317,718 shares outstanding, alongside 1,539,999 warrants and 3,634,142 options.
Important Disclosures:
- As of the date of this article, officers and/or employees of Streetwise Reports LLC (including members of their household) own securities of Red Cat Holdings Inc.
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