In the past, I have written several articles regarding Force Protection (NASDAQ:FRPT) and what I believed were the major drivers either pushing the stock into positive or negative territory. There is little doubt that I never expected the share price to endure the incredible losses that it has, reaching a low of $1/share on Monday, March 17, 2008, compared to $15/share as of the writing of my previous article, and noting that this stock once topped $31/share less than a year ago.
Although a research chemical engineer by training, I am not specifically versed in quantitative stock analysis (e.g., chart analysis), nor do I work in the financial sector. Rather, through due diligence, quantitative analysis (e.g., simple accounting principles), and devouring as much news as possible, I have tried to make some arguments for why I believed Force Protection would ultimately be amongst the premier MRAP suppliers for US military operations. I assumed this lofty goal would occur over a range of vehicle categories, from the larger troop transporter, such as the Buffalo, to ultimately being the front-runner in the Humvee replacement program through the Cheetah.
Simply put – I was absolutely wrong. Although I try not to post on the various message boards any longer (e.g., Yahoo Finance and Google Finance), there has been an incredible polarization of shorts and longs on this stock, particularly with the recent announcements of several class-action law suits claiming that Force Protection management has been negligent to shareholders, and provided false investment information that ultimately mislead investors.
I believe the rise and fall of Force Protection is directly related to primary factors, which, unfortunately, I underestimated. The first is directly related to a thesis previously presented in my earlier articles. Force Protection’s business performance is exclusively based upon the number of vehicles it can manufactures, and subsequently sells. It does no good to receive a massive order for vehicles if manufacturing capacity is ill-equipped to deliver, and similarly, it does no good to have extensive manufacturing capacity without a healthy order list (although one could argue that receiving massive orders is preferred since manufacturing capacity can be out-sourced, at a cost of course).
Force Protection operates under this premise in a riskier environment than most traditional vehicle supply providers because it has one customer providing all of the demand – the Department of Defense (DoD). There were ample reasons to believe that Force Protection was a preferred supplier for DoD, some of which included:
- Strong intellectual property portfolio of the V-hull technology;
- The only MRAP provider to have two class of vehicles, the Buffalo and Cougar, operating in the field for significant amounts of time, with significant exposure to IEDs, and proving incredibly effective against insurgent counter-measures;
- Rapidly expanding and state-of-the-art manufacturing capacity at all three scales: Buffalo, Cougar, and the smaller, lighter, Cheetah, which was requested by DoD; and,
- A strong history of increasing supplies, meeting incredibly aggressive timelines for vehicle delivery, and where required modifying engineering designs to meet evolving demands.
In short, there was no reason to believe that Force Protection could not sell every single vehicle that it could produce, especially in a climate where the DoD suggested it would purchase every MRAP that could be purchased.
The primary reason for Force Protection’s decline to current price levels is that the customer failed to show up to the store and buy the product. It’s as simple as that. The DoD has instead chosen competitors that unfortunately do not have the performance history that FRPT vehicles have, which while does not necessarily mean they are inferior, certainly does mean significantly increasing risk for our troops. One could perhaps justify such risk if either the competitor’s vehicles represented superior technology or more cost-value, but from the public information available, neither of these facts appears to be true.
The second factor is not customer related, but rather can only be directly attributed to Force Protection senior management. I find it hard to believe that any reasonable investor, particularly those with experience in the manufacturing sector, would have significantly deviated from Force Protection’s investment in manufacturing capacity. Capacity was always cited is the number one reason for why DoD would perhaps consider other providers, therefore, I think management was wise to ramp up on manufacturing capacity as quickly as it did.
What is simply irreprehensible, and I believe angers investors to their core, is the lack of accounting discipline and structure by Force Protection senior management. While I don’t believe the accounting deviations reported were done intentionally with deception as an end-goal, there is no excuse for not having clear accounting. This is particularly true because Force Protection is a materials supply and demand business with no sophisticated accounting typically required of large international corporations that provide service, product, and/or capital. This, coupled with DoD’s irrational treatment of Force Protection, I believe, has been the primary drivers to the current share price of $1/share.
What do we do now? This is a question that is being asked by many, including myself. Having sold and bought shares at various price points, both making and losing money on various trades, I am holding my current position. I believe that the recent sell-off to $1/share is clearly over-done; however, to reach anything +$5/share, the above two factors have to absolutely be resolved.
First, and foremost at this point, Force Protection management must ensure investor confidence, both in accounting and that creating shareholder value is a priority. I, along with other investors, have been stunned at the lack of a corporate response as the price has fallen by as much as 25-35% in a single day, for repeated days. This is unacceptable.
Second, Force Protection must establish an expanded customer base. It’s clear that the DoD is not reliable, therefore, all efforts should be focused on identifying other customers, whether they include targeted defense sales to other nations, or targeted sales to specific multi-national organizations (UN Peace-keeping, NATO, etc.). Although it could be argued that the Cheetah still has a possibility of becoming a Humvee replacement, the recent DoD behavior would suggest otherwise, therefore management should eliminate this from discussion as a future source of business (e.g., if it happens, wonderful).
Lastly, I would like to say that there is significant debate as to whether this stock has been heavily manipulated, primarily by short sellers using naked shares. Certainly, this may have contributed, but I hesitate to cite “market manipulation” as a primary driver, since it’s something that cannot be proven or addressed by management moving forward. Therefore, let’s focus on what Force Protection can fix.
If Force Protection can address the above two issues, immediately, while at the same time demonstrating that shareholder value is important to them through issuing more responsible and frequent press releases, then perhaps discussion on being an acquisition target can proceed. This would be step three, in hopes that one of the other major defense contractors would be interested, if not as an acquisition target, then at least as serving as a manufacturing contractor.
I clearly don’t have a good track record with predicting the share price direction of Force Protection, but I hope that changes from this point forward, along with the share price direction, assuming Force Protection is reading.
Best of luck to all investors, shorts and longs, and I look forward to hearing your comments, questions, and suggestions.
Disclosure: Author has a long position in FRPT