Force Protection's Odds in the JLTV Race

Fresh off watching the Kentucky Derby, I am inspired to consider the prospects of my favorite defense sector longshot, Force Protection, Inc. (FRPT), and their competitors, heading into June's momentous JLTV source selection announcement.

What is JLTV?

JLTV is the JOINT LIGHT TACTICAL VEHICLE, the follow-up platform intended to replace the High Mobility Multipurpose Wheeled Vehicle (HMMWV or Humvee) for both the Army and Marine Corps. Six teams have submitted proposals. Three teams are expected to be awarded initial System Development and Demonstration awards in late June, based upon their submissions.

Let's introduce the contestants on the Racecard and put up the opening odds:

General Tactical, starting at the pole position and definitely holding an inside track to finish in the money is the partnership of General Dynamics (GD) and AM General. These two companies already provide the Department of Defense with a shock and awe-inspiring array of current land combat vehicles, including the HMMWV, the Abrams Main Battle Tank, and the Stryker Light Armored Vehicle (aka LAV II/III in Marine Corps.) ODDS: 3/2

BAE Systems (BAESY.PK) and IMG (NAVZ.PK), are coming into this competition fresh from victory in the lucrative MRAP race. This partnership, in addition to current favored MRAP status with Army buyers, is also a prime supplier of military vehicles, including the Bradley Fighting Vehicle, the M113 and multiple variants of military transport and recovery vehicles. ODDS: 2/1

Lockheed Martin (LMT) and Armor Holdings Inc (Division of BAE Systems), are in many ways the dark horse of the race. Lockheed has demonstrated a real commitment to winning this contract, producing numerous prototypes and mounting an impressive marketing effort earlier than anybody else. Lockheed Martin is certainly also a force to be reckoned with in Defense systems, but that would be primarily an AIR FORCE. One has to question the commitment of BAE to this proposal, also, as a junior partner when they are also competing as a prime contractor. ODDS: 12/1

Boeing (BA), Textron (TXT) and SAIC (SAI) with special guests Ford (F), Millenworks and Carlson Technology, proffer a vehicle with a hybrid drive train, touted as fast, cost effective, easy to maintain and providing crew with greater visibility. Presumbably, the vehicle will also armored, though no details of this particular feature have been shared. With due respect to these experienced and formidable companies, this looks like the old grey mare. ODDS: 30/1

Northrup Gruman (NOC) and Oshkosh Truck (OSK), Plasan Sasa and maybe or maybe not Ceradyne (CRDN), would otherwise be an uninteresting late entry into the field, except for the success of Oshkosh and Ceradyne to win coveted MRAP II approval status for their BULL vehicle. There is considerable buzz about this being 'game changing' technology, so they become one to watch. ODDS: 5/1

DRS Systems (DRS) and Force Protection (FRPT), round out the field. An honest assessment has to rate them as something less than favorites, but still in the running. From an investment perspective, however, this entry offers some intriguing considerations, which I will explore below. ODDS: 8/1

In-Depth on Force Protection Investment Impact of JLTV

This is where things really get interesting. I should begin by saying that I do not expect the DRS and FRPT bid to win the contract to actually field the final JLTV. DRS is principally connected with peripheral systems and while FRPT's designs have been hailed on the battlefield, Army procurement has demonstrated time and time again that they are not 'With the Force'. It is also worth noting that Force Protection is uniquely dependent among the vendors here to demonstrate they are back in good graces with U.S. military buyers.

So, does this makes a strong investment case to short FRPT going into late June? Woah, there! What this actually demonstrates is a strong case for riding enthusiasm for this prospect into the June run up.

While recent enthusiasm over foreign orders and anticipation of a clean, if late, annual report have created an impressive run up from the shockingly low abyss that FRPT was thrown into by loss of MRAP orders, recent signs point to an upcoming retraction to price levels once again attractive for a show bet on Force Protection's participation in the next phase of JLTV.

Remember, June's announcement will not select a winner, but rather simply reduce the field. In light of this distinction, DRS and Force Protection stand a good chance of making that field. If they do make it, this will inevitably lead to speculation of an acquisition of Force Protection by the bevy of eliminated competitors (or perhaps even another survivor.) The potential for substantial and quick gains is considerable.

Considering the down side, as we must, will elimination signal a gruesome breakdown for FRPT if it fails to make the top 3? Perhaps so, in the short term. However, company officials have already acknowledged that their real hope for future success lies in foreign orders and expanding connections with larger vendors. These initiatives continue to garner interest and drive growth. Elimination could prove to be another opportunity to expand a moderate position at an attractive discount. With zero debt, sizable cash reserves and guaranteed income that extends several years into the future, FRPT looks like a good investment, beyond the short and medium term trades and bets on individual catalysts.

Conclusion

You owe it to yourself to sit down with the charts and ponder an investment in Force Protection. Once you've placed your bet, look forward to an exciting run.

Disclosure: I currently hold no position in any of the companies listed here, but have held long and short positions in the recent past and plan to open positions again in the near term.

Comments

[prsguitars]

Actually a great article on FRPT. I was impressed to note the objectivity and lack of general bias that usually taints articles about this defense contractor; this article actually considers risks and rewards pretty fairly.

Much applause for solid journalism (so sparse these days). And go FRPT! I think the military took issue with production/delivery scheduling issues (obviously a major issue for a fighting force) and FRPT's accounting issues, in that order, and they're both being resolved as we speak.

FRPT is working a new plant to add production capacity and meet deliveries more accurately, and they've also hired Grant Thornton as their auditor for the 10K/10Q restatement (a large factor in why the stock has performed the way it has for the past few months).

Thanks and keep up the legit FRPT articles - lord knows we need more of them, Bullish or Bearish in sentiment, so long as they keep the forest and trees separate.

[Drizday]

For the sake of the troops, GO FRPT