Spartan Motors: Money in the Bank

Spartan Motors (SPAR) is Michigan-based manufacturer of chassis (chas-seez) for RVs, emergency vehicles, and military trucks.

There are three key drivers we think are going to hit Spartan’s bottom line like a ton of bricks.

1) Baby Boomers: Everyday, 55,000 people hit retirement age. These people have money and they want to spend it outdoors, not in a Bingo lounge. Demand for RVs has skyrocketed as a result and SPAR is in the driver’s seat.

2) Firetrucks: Post 9/11, safety concerns have increased the amount of federal funding allocated to fire truck replacements. That’s because 54% of fire trucks in the US are at least 15 years old; 33% are 20 years old. This is a huge liability no fire department wants to get stuck with and I think we’re on the cusp of a major fleet replacement cycle.

3) Military vehicles: SPAR recently signed a contract with ForceOne Protection (FRPT) for a mine resistant (MRAP – mine resistant, ambush protected) vehicle. These trucks can drive over a roadside bomb and drive away unscathed, thanks to SPAR’s steel chassis. As of today, not one soldier has died in these armored trucks. Investors can’t get more patriotic than that and SPAR provides great small cap exposure to the defense spending space.

There is a huge backlog going back to 2004, very little analyst coverage, and I they’re going to crush earnings when they report on the 27th as more orders & contracts pour in. Currently trading at just over 1 x sales, Spartan looks safe and attractively valued relative to the $1.50 EPS estimate we have for 2008 (assigning a 22x forward multiple).

Investment Thesis

• 5Y Sales CAGR of 11.4%, 800 bps > industry average
• Earnings reacceleration story: Net income up 105% in FY06, along w/ a 300 bps ROIC improvement.
• Increasingly active Baby Boomers are driving demand for RVs; 25% US pop > age of 55; 1 of every 12 American households owns an RV.
• Municipality & federal budgets for fire truck replacements spike post 9/11 amid safety concerns & aging vehicle fleets (54% of fire trucks > 15 yrs old)
• Cougar troop vehicle: 0 roadside bomb fatalities.
• March 26: SPAR lands $17M subcontract for 155 [MRAP] specialty vehicles; order reflects just 3% of potential future orders.
• Backlog up 43% to $167M going back to 2004.
• Has developed short term track record of blowing away EPS estimates (Q406 earnings surprise ~ 53%)
• EV unit operated @ EBIT loss, about to turn profitable.
• Low debt, $506M market cap makes Spartan viable takeout candidate for larger defense player.
• 1.1x price/sales & 1.0 PEG gives SPAR attractive valuation.

Key Investment Risks

• Waning Boomer interest in recreational/outdoor activities amid economic downturn
• Aluminum & steel price increases could adversely impact profitability.
• Defense & municipal budget cuts
• Miniscule 19 M float could mean a bumpy ride for investors.

Conclusion

Spartan is money in the bank. The team of students I work with here at the Kelley School of Business is thus assigning an aggressive buy and would urge investors to see pullbacks as blessings in disguise.

SPAR 1-yr chart

Disclosure: The author is an MBA candidate at The Kelley School of Business at Indiana University. On Tuesday April 4th, he spoke about Spartan on CNBC’s Mad Money, subsequently driving shares higher by 2.33% in after hour trading. He does not work for CNBC and was not long the stock at the time of taping or at the time this publication was written.

Comments

[dcappe10]

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