Since that post, the price has continued to significantly decrease, to the mid-teens, reaching a low of just under $15/share. As recently as Tuesday, August 7, General Dynamics (GD) was notified by the Pentagon that they were receiving a significant MRAP order - $338.7 million – causing FRPT shares to decline by as much as 11%.
In the interest of getting to the point as quickly as possible, let me submit the following reasons why Force Protection represents an excellent buying opportunity, particularly as the market continues to suffer at the hands of sub-prime mortgage concerns, lack-luster hedge-fund performance, and general fears over the ability to finance debt:
1. Force Protection fundamentals continue to be extremely strong. This is supported by the consistent increase in production capacity, culminating with the addition of a nearly 430,000 ft2 facility in Roxboro, NC, for the exclusive production of the Cheetah. This will be further affirmed by the upcoming earnings release, which I believe Force Protection will meet (Average Estimate: $0.13/share).
2. Force Protection’s share value should not be based on the number of orders won by other MRAP manufacturers. Rather, FRPT should be exclusively valued on the growth rate of their production capacity and ability to sell every single vehicle they can produce. This is what will ultimately drive earnings and profits, and consequently, the price per share. MRAP funding, particularly when one considers the separate programs dedicated towards Hummvee replacement, offers an enormous market which under no circumstances was Force Protection ever expected to exclusively dominate. However, ask yourself, “Is this market big enough to fuel FRPT’s accelerated growth rate and sales, even if other competitors receive market share?” The answer is a resounding yes.
3. When you see the tremendous volatility we are seeing across the broader market, you need to take a step back, and strongly consider a sector analysis. Even if individual equities within a given sector have strong fundamentals that warrant increased valuations, if the sector is viewed negatively, then it’s likely to be the dominant force. Under these market conditions, I think the defense sector represents a spectacular buying opportunity.
Specifically, this is because:
a. Defense spending continues to increase aggressively, with concerns that Democrats taking control of the White house will lead to severely decreased military spending now being refuted. Democrats, voiced through the likes of Senator Joe Biden of Delaware, Chairman of the Foreign Relations Committee, acknowledge that immediately pulling out of Iraq is completely unrealistic. The best estimates conclude that even if the order is given to pull-out tomorrow, it will take a minimum of one year to remove all the forces. Furthermore, although there is military progress being made in Iraq, political progress continues to stagnate, meaning that it’s unlikely that US Commanders on the ground when they report to Congress in September will recommend any type of force reduction.
b. Defense spending, and in particular programs and discussions geared towards replacing the Hummvee, are not exclusively dictated by progress in Iraq or Afghanistan. Rather, this represents a long-term, cyclic commitment to upgrading a fundamental component of our over-all military readiness. With the performance of the Cheetah, the recent attention it has received from the Pentagon, and the expanding production capacity of FRPT, there is enormous potential for FRPT to dominate this multi-billion dollar market. Military readiness, on general terms, is very much a topic of discussion. In fact, the most recent issue of the Economist has an excellent article outlining the growing concern over China's increasing military readiness. With the expanding military readiness of both China and Russia, you can be assured that a fundamental component such as ground force transport and readiness will not be over-looked.
c. The defense sector is not sensitive to the present concerns over financing debt. In fact, defense companies, much like Proctor & Gamble (PG), manufacture products that are required in both slowing and growing economics, and therefore present a great hedge against the current volatility. As the market volatility continues you should see the defense titans, such as Boeing (BA) and Raytheon (RTN), continue to grow their valuations.
There is no question that I never expected FRPT price levels to drop has heavily as they have, and this was probably due to an underestimation of the short pressure. However, if you’re in this for the long-term, then this should simply be viewed as a sale on FRPT shares. If you’ve got a fundamentally strong company, driven by growth in earnings and profits, in a fundamentally strong sector, which is made even stronger by the steep decline in other sectors, then you’ve got a winning stock. My gut tells me that if you\\'ve got some liquidity consider purchasing FRPT ahead of earnings, and particularly prior to September.
September represents likely additional MRAP contracts being awarded, and, a critical report from US Commanders in Iraq which could set the stage both for military spending, but also dominate the news rooms. FRPT should run back into the high $20s on any bullish news. Best of luck to all investors and traders, and as always, discussion and comments are always welcomed.
In the interest of full disclosure, I am private, novice investor, that holds 2025 shares of FRPT at a price entry level of ~$16/share. I have bought, and sold FRPT since it was $2/share. I look forward to hearing everyone's comment, shorts and longs. Only through discussion can we perform better analysis.
FRPT 1-yr chart: