Force Protection: Classic Example of Defense Boom/Bust

The US defense budget has a history of boom and bust. It will grow rapidly for a few years, and then the US military will be starved of funding for a few more. Then the cycle repeats. Obviously with the current wars in Iraq and Afghanistan the large budgets have existed for several years, but eventually these too will be reduced, possibly as soon as 2009 with the next administration.

Also within large budgets priorities change over time, so a system that is receiving large funding may suddenly become less important. This has been true of the Mine Protected Ambush Resistant [MRAP] vehicles

Over the last three years the primary threat to US soldiers and Marines in Iraq and Afghanistan has been the Improvised Explosive Device (IED). These are mines or command detonated charges that line the roads on which the US forces are heavily dependent for transportation and logistics. The US military’s first response was to increase the armor on their existing fleet of HUMVEEs and trucks. Then they deployed heavier armored vehicles, like the M113 and M114 fully tracked carriers from the 1980s. The final decision, at Congress’s urging, was to start deploying MRAP vehicles.

These were large wheeled vehicles with heavy armor that had arisen out of the needs of the South African and Rhodesian military for fighting guerrillas in Africa whose primary weapons were mines. The vehicles were shaped and armored to protect those being carried. Congress could not fund the purchase of MRAP vehicles quickly enough, and large amounts of money were appropriated for them.

One of the major beneficiaries of this was the South Carolina company Force Protection (FRPT). This 1997 start-up at the closed Charleston Navy Yard made heavy armored vehicles in small quantities for a variety of customers. Now it had more business then it could handle. The company and stock took off from 2004 onwards. It had to move to a larger facility and increase production. In early 2007 the stock shot up; in July 2007 it peaked at $31 a share.

Unfortunately for Force Protection, the Marines, and now the Army, are reevaluating the use of the MRAP. Not as many of the vehicles are required as was originally thought, and other companies, more traditional defense contractors, sprung up to compete. In the last DoD award for MRAP vehicles, Force Protection got less then 5% of the total order. At that time they could write on the wall when the last vehicle they were producing would roll off the assembly line. FRPT has received some foreign orders recently, but nowhere near what they were getting two years ago. The stock currently is trading at a little over $3.

There has also been a lawsuit filed by a group of shareholders alleging that the company officers were not honest about the company’s financials and are managing it improperly. The company is staggering.

Poor management aside, FRPT is a victim of the US defense funding cycle. For a few years DoD could not buy and field enough systems. Now they are starting to wind down acquiring these systems. Competition has heated up and the rapid acquisition that the Army and Marines are using provides them agility in switching suppliers.

In a more traditional program developed and produced by one company, you have a steady stream of orders and the military cannot switch easily to another manufacturer. The provider also gets long term funding from providing parts and engineering support. Force Protection in some was a victim of its own success.

Can Force Protection pull it out? It may require some diversification of product, or a push to sell to other countries. The obvious trend from DoD is to require less of these systems. It is clear that at some point there will be a change in management. The lawsuit may force it, or there may be a takeover. Either way, I would not bet on its stock recovering significantly in the future.

Disclosure: The author has no positions FRPT.

Comments

[Jimmie5497]

We are not down, nor are we out. We will survive with foreign orders and new products and parts / services for the existing units. This process with the new management has already begun. We already have foreign orders and more are on the table as I write this. The Cheetah should already be in the field since our soldiers die almost daily from IEDs blowing up their HUMMVEEs.

[Wadi Rum]

The article is correct that the stock is unlikely to get back to 31. However, it is not currently selling anywhere near there. A move from $3 to $6 would be a tremendous return. So the question is really not whether it will go up by 1000 percent.

So what is the case for buying FRPT? At $3, the market cap is about $200M. It has $70M in cash and no debt. So that explains about a third of the market cap. Then it has accounts receivables and inventory (net of payables) that explain nearly another third of its market cap (and the receivables WILL be paid barring a default by the US govt). So, for the remaining $70M-$100M in market cap you are getting an order backlog of near one billion (with a "b"), an additional order stream of Buffalo vehicle to the US govt of about $100M/year for the foreseeable future, servicing revenues (over $100M/yr while they we are at war, much less if most are mothballed), anticipated orders from DOD to upgrade the existing fleet (perhaps another quarter billion), and the potential for future foreign orders (so far FRPT is favored by the English, Canadians, and Italians, and FRPT has responded to 4 other foreign RFPs, including one for Cheetah). Oh, that's right. I haven't mentioned Cheetah, the lighter, faster, higher MPG, more off-road friendly MRAP that happens to have passed DOD blast testing at the higher MRAP II standard. Then there is the JLTV program to replace the Hummer, where they can be subcontractors even if they and DRS do not win the design competition.

That to me is a lot to get for $100M. Again, the stock does not have to get to $31 to yield a very, very nice return. The stock is, however, "in play" with traders and has a large short interest. Thus, do not bet the farm and do not buy if you can't weather a move from $3 to $1.50 on your way to $6. I believe that patience will pay off on this one -- and there is a fair chance that the move to $6 will happen sooner rather than later.

All just in my own opinion. Disclosure: I definitely do have a long position in this stock, with a basis around $2 this time around. I trade a portion of my position based on TA.

[Mike Muedie]

Disclosure: This is more of a comedy than an accurate view of FRPT.

[Mike Muedie]

FTD ALERT!!!!!!!

Failure to Deliver accurate reporting

[Schweijk]

Reality is, this stock trading under its value. German bookvalue means plants cash and inventorys.
If u make a counting on this u will c how much we trading under the real value.
Book value is in germany everything u have u can sell after u are insolvent.
and we are far away from that value trust me.

[User 180066]

Wow, this article is one-sided at best, irresponsible reporting at worst. FRPT has many positives and is trading at far below its value at this point.
"I would not bet on its stock recovering significantly in the future."
That depends on your definition on "significant"... If you mean 3000% in 6 months, then no, probably not, but another 100-150%? Definitely possible at this point.

[jerryvanee]

The bottom line is FRPT trucks protect the lives of the soldiers inside them over 99.99% of the time and are battle tested by over 3,000 IED's/EFP's in theatre surpassing all competitors. FRPT vehicles survive bombs over 500 pounds whereas the government's testing standards were for 30-50 pound bombs which in my book allowed Navistar/Bae products to pass and permitted thousands of inferior trucks to be purchased. Sooner or later Congress will realize this and DoD will be forced to buy quality FRPT products. In the interim FRPT has contracts with other countries through the end of this year and besides the Cheetah's potential in Afghanistan FRPT is looking at DoD rebuilds. In my opinion FRPT has the potential to reach $31+ in a John McCain Administration. Patience pays. (Long 12,000+ FRPT shares)

[MRAP1]

Who paid you for this article? Seems everytime this stock has some upward movement you guys come out to bash! This is pretty sad considering what this company did for our Troops. They develope a vehicle where the troops are safe in, Save the lives of our children and others, yet our Gov't has shunned the product for Knockoffs. They gave the product out to copy, and the copies are not as good
and don't have the survival rate as FRPTs vehicles. The others got involved for the almighty $$$$. Thats OK but don't shun the innovator, To me it seems to be the better vehicle because everybody else wants it, ie Canadians, Italians, even the UK which has its own manufacturer, yet they buy from Force, Why? because they care about the peoples lives they are going to save. Not war profiteering, There was a ramp up bonus, all have invoiced for except Force Protection, when the need for more vehicles arose the partnered up with GD, trying to give DOD all they wanted, what did the DOD do they halted orders till the others were ready for production, SAD really SAD. You have not assessed this with true DD just the info the short interests have given you. Bad Journalism at best, you shoul be ashamed of yourself.

[ScottEranger]

Mr. Potter,

I believe your article to be factual, but of course opinion and your interpretation of the situation at hand.

"Can Force Protection pull it out"? As an investor, this has far more to do with simply "pulling it out."

The stock is trading as if it is going out of business, although recently it has firmed up and has traded around $3 for several weeks. It is most certainly not going out of business.

Will the stock get back to $31? I don't think so...the market cap is ridiclous. (Low and undervalued) lThey have plenty of cash. They have a spare parts business and build a quality product and other countries are interested in their vehicles. They have a partnership with a proven military providers...DRS. They have new management working dilligently to restate earnings, which is my opinion will not affect their current cash position. FRPT is a buyout candidate at these levels...a company could pay $8-10 and still be getting a great value. They have the Cheetah, and neither you or I can predict what the DOD will do...

Perhaps FRPT was a victim of "it's own success." Without competent management to handle growth properly, success and growth can be a death sentence.

There are three things one needs to make money in the stock market as an INVESTOR...patience, patience and patience.

S Eranger

[TAS]

I recall writing in response to an inquiry asking my opinion on FRPT months ago when it was approaching $30/share. I professionally answered the inquiry (basically, the stock had a great move up but was overpriced because of prospective competition, etc.). I was villified by the cast of characters that live and die by dogmatic reluctance to have seen the writing on the wall. It was actually quite humorous - if you didn't want my answer, then why ask the question?

FRPT may be a deal at a couple of bucks a share.Personally, I doubt it. Zealots will ride it, pump it and eventually crash and burn. All too familiar for novices, and inexcusable for seasoned investors.