Spartan Motors: Upside Not Dissipating Anytime Soon

Shares of Spartan Motors (SPAR) have climbed by as much as 32% since I pitched the stock on CNBC during Jim Cramer’s Mad Money Back to School Tour.

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Michigan-based Spartan, which makes chassis for RVs, ambush-protected military vehicles (MRAPs), and fire trucks, has turned into one of this year’s most explosive growth stories. Below is a quick follow up on what has happened over the last month and why we think that even after such a stratospheric run, shares should see more upside over the next few months.

SPAR Crushes EPS Estimates: On May 1st, Spartan walloped even the highest analyst estimates (only 3 analysts currently follow Spartan, something we do not see lasting very long) when it reported Q1 EPS of 33c vs. consensus of 28c. Q1 revenue of $142.9M came in against a consensus of $126.45M. The company's Board also declared regular cash dividends of $0.16 per share of common stock for 2007 and hinted at a special dividend for 2007 at its meeting in October. Overall, the tone of the conference call was very pleasant and shares were awarded in the days following the call, although short term traders used the EPS announcement to take profits. Smart investors bought in, however, and saw shares immediately recover within a trading session.

FRPT Lands Mammoth Contract: On April 23rd, Force Protection (FRPT), manufacturer of the MRAP vehicles for whom SPAR is supplying the V-shaped, bomb-resistant chassis, secured a $481.4M U.S. DOD contract for additional Mine Resistant Ambush Protected, Low Rate Initial Production vehicles. The government signed up to purchase 300 Category I Vehicles and 700 Category II Vehicles, for a total of 1,000 vehicles. As impressive as it sounded, savvier investors knew that total MRAP vehicle requirements were (and continue to be) estimated by the Marines to be in excess of 7,700 vehicles, worth an approximate $8.4 billion. The party was just beginning.

SPAR Lands Its Own Monster Contract: On May 10th, Spartan Motors announced that it had received a $107.6M order from two major defense manufacturers totaling $107.6 million -- its two largest specialty-vehicle orders to date. The contract has Spartan Chassis supplying chassis components in the production of advanced tactical vehicles expected to be used by U.S. forces in Iraq and Afghanistan. The vehicles are designed for protection against mines, improvised explosive devices (IEDs) and other hazards. Because the majority of soldier fatalities in Iraq are caused by roadside bombs (the US Army estimates that as much as 80% of American combat deaths are caused by IEDs; meanwhile the UN estimates that for every mine that is cleared globally, another 20 are planted. IED-related deaths doubled in 2006 and there are an estimated 110M active landmines worldwide) the contract proved that Spartan was indeed the patriotic, robust growth story Cramer got psyched about after he visited and talked to the MBA students in Indiana. Still, the question remains: how long can SPAR’s growth last?

SPAR: $1B in Sales by 2012? As our model indicates, SPAR could be grossing as much as $1B in annual revenues within 5Y (by 2012), assuming, of course, that government spending continues to move as the brisk pace that it has over the last years and Spartan continues to be the go-to firm for MRAP orders. The risk of newer rival technologies, higher fuel prices, customer concentration (60% of sales come from 5 large customers) and slashed government spending is great, but we think management has the deep laser focus to help Spartan move forward (CEO John Sztykiel, age 50, has been with SPAR since 1985). To help meet the US Military’s recent request for a 20 unit/day production rate, for instance, SPAR’s management went out and bought two new manufacturing facilities (80K sq feet).

We think SPAR’s 3 business segments offset each other in ways defense spending pure plays cannot: if RVs sales are weak, MRAP contracts can help offset slower sales and vice versa. The sheer fact that approximately 54% of fire trucks here in the US between 15 and 20 years old leads us to believe that this segment of SPAR’s business model (19% of sales) will continue to enjoy stable growth for the foreseeable future: currently, the NFPA recommends that all fire trucks built before 1979 be replaced. This August, Spartan will unveil the M-Series™, a chassis customized for the mid duty commercial fire truck market. Since this chassis will be the only one on the market that meets the stringent 2007 EPA standards, the M Series™ could significantly add to Spartan’s distribution capabilities.

We expect total sales to taper down to a 10% growth rate within 5Y and would look favorably on short term pullbacks as attractive entry points. Because the US Army is expected to ask for $9B to purchase 9K MRAPs in FY08 and additional money to purchase 8.7K in FY09, the possibility of Spartan shares trading higher is almost guaranteed. Today, Humvees (remember those?) cannot protect our soldiers the way tactical MRAPs can -- MRAPs are the vehicle of the future and SPAR is watching the money pile up like never before. Overall, we believe SPAR presents an attractive mix of steroidal top line growth, non-existent debt, added capacity, a bloated backlog, and a recovering RV market, not to mention the aforementioned fleet replacement cycle & MRAP order flow. Furthermore, the recent buyout of Armor Holdings (AH) by BAE Systems plants Spartan as a viable acquisition target; its $700M market cap is a rounding error for most mega cap defense contractors. Get your sparklers ready, folks: shares of Spartan will take out $35 before the 4th of July and barely break a sweat.

Disclosure: Dan Jacome is an MBA candidate at the Kelley School of Business as well as founder of Ceviche Fund Partners LP. He is greatly indebted to Ned Borland at Next Generation Research LLC and James J. Cramer at CNBC for all their insights & unbridled support. At the time of publication, the author did not hold a position in any of the securities mentioned.