Allied Defense Group: Ready to Retaliate

Allied Defense Group (ADG) has been blown-up, mangled and flattened during the last 9 months. At present, ADG is slightly above its 52 week low of $3.50 and 75% off its 52 week high. ADG is a diversified international defense company which develops and produces conventional ammunition marketed to defense departments worldwide. The Mecar S. A. division produces advanced conventional medium to large caliber ammunition and sophisticated weapons systems. The complete spectrum of rounds range from 25mm to 155 mm and beyond. The company is also a world leader in bullet trap grenades and a complete line of hand grenades.

This company is now in a major turn-around mode and in our opinion has the potential to appreciate between 200-300% during the next 3-12 months.

The reasons:

1. Restructured and re-capitalized and re-issued a $30 million note ( which can be bought back by management during the issue period. Secured another $15 million in funds from other sources. Resolved all outstanding disputes with note holders.

2. Completed a multi-year restatement, implemented improved internal controls and improved the financial team.

3. Recently sold two division reaping some $50 million, which will be used for working capital and possible debt reduction. Divesting other chronically unprofitable subs and will continue to divest additional suds that perform poorly.

4. Secured a sizable backlog- was $59 million at the end of June 07, but then announced a $170 million series of contracts to be filled during the next 2 years. Management mentions other potential contracts to be announced.

When the re-org was recently completed (June-July 07) the stock was trading around $10, but an investor bought 1.2 million shares of stock priced at $3.85 -resulting from Note exchange and re-funding of the company. Because of the scenario the seller has been pounding the shares down to current levels. The good news is that the selling and shelling is close to being over and ADG shares should start to appreciate and be more representative of the true value of ADG and the extremely bright future of the newly emerging growth story.

At present there are around 9.2 million fully diluted shares outstanding taking in account options, warrants and the recent 1.2 million funding shares. Management and friendly Institutions have been heavy buyer of shares during the past 12 months and like everyone else have been blown-up and made numb by this period of re-org.

In our opinion, the bad ride is over and now we get to go to Disneyland! According to the recent press release, "the recent contract will be completed within a couple of years"--this means to even the sucker punched investor that for 2008 rev should reach between $110 million and $130 million and profit should be very strong! We remain conservative and assume a profit for 2008 of at least $1.00/share. With the current share price of $5.00 this yields us an estimated PE estimate of only 5X.. Peers trade at15 to 20X! With the recent cash infusion from the Notes and recent sale of divisions yielding ADG with $50 million in cash and only 9.2 million shares outstanding fully diluted it is easy to conclude that this company is very cash rich, fully funded by lenders, a huge backlog of over $220 million with more contract pending, a completely re-org company- mean and lean and a stock price that is extremely undervalued based upon current as well as future fundamentals. ADG is obscure, undervalued, under the radar screen and offers smart warriors a ground floor opportunity to reap huge gains with limited risk even if you living in a bunker.

Disclosure: Author has a long position in ADG