What's Causing Force Protection's Price Volatility?

| About: General Dynamics (GD)

The recent price action in Force Protection (NASDAQ:FRPT) perhaps best exemplifies the definition of stock volatility. Recent price action has seen price highs of $31/share, only to see prices of nearly $21/share tested as late as Tuesday, June 26. There has already been significant press and analysis on Force Protection. The points most often mentioned, which I will not elaborate in detail are:

1. The incredible growth this company has seen in the previous two years, which may be defined using various metrics.

A) Ramp up of product research & development to full manufacturing, distribution, supply, and support. This is quantitatively measured by looking at the per month vehicle supply increases.
B) Growth of the business, either measured by FRPT's stock increase from $5 to $31 in 52 weeks, or the growth in the total number of contracts, well in excess of $500 million.
C) Growth of the company in terms of public exposure, with FRPT featured on major financial and mainstream news and media outlets.

2. The demand for their various product platforms in the context of the various military actions U.S. forces are presently engaged in across the world

3. The impact of significant insider training and departure of their senior management

4. The impact of competitors such as NAVISTAR being awarded unexpected military contracts, or impact of expected competitors now being viewed in a more favorable light than before.

This list can be expanded, and in most cases significant analysis has been performed and made available on each of these points. However, I have yet to see a clear hypothesis for the volatility in Force Protection. It is important to realize that the various points I mentioned above have not really been submitted as hypotheses for the volatility in the stock. Rather, they have always been presented as definitive reasons for where the stock is going, with some analysts feeling FRPT will drop or rise significantly, depending on the weighting you assign to each point above.

The question I would like to address is how can FRPT go from $31 to $21, jump back to $27, and then drop again to $21, as it has recently done? What is causing this volatility, and most importantly, what can management do about it.

Although the answer is never black-and-white, I think the main bullet point that is not considered in a stock like FRPT is the nature of its customer. We need to remember who the customer is - the Department of Defense of the United States government. Unfortunately, as many things in Washington, the procurement of these vehicles, whether they be from FRPT or other vendors, has been politicized to a sickening degree.

First, DOD and the Bush administration, strongly argued that the Democratic controlled Congress was delaying funding. They assured us that if the Democrats would pass the appropriate funding bills, then DOD was ready to procure the necessary resources. Well, the Democrats provided that appropriation, and we have yet to see the significant orders. Ultimately, the volatility in FRPT is, I believe, simply a failure of investors to realize the instability, unpredictability, and ineffeciency of the customer.

FRPT as a company, both in terms of management's performance, product's performance, and the future outlook is extremely effective. Anyone who has any experience in manufacturing a military product, particularly one as complicated at the Buffalo, Cougar, or Cheetah, understands what it takes to meet military specifications in the time limits they're requesting.

FRPT has done exactly what it should do - focus exclusively on producing the highest quality vehicle possible, in record time, and growing the business. It has partnered and/or developed highly effective relationships where synergy existed (General Dynamics, Spartan Motors, etc.), while still growing the business organically, through infrastructure expansion, and employee growth. Senior management has sold FRPT, but quite frankly, with returns on their initial investment greater than 1000%, it would be completely irresponsible not to take some profits. Investors need to focus on FRPT the company - not the personal financial decisions of management that are completely justified.

FRPT has delivered everything that DOD has requested, and FRPT management is not focused on the stock - it's focused on the business, as it should be. Unfortunately, DOD has simply not delivered. I am confident that in the end, FRPT will be successful in securing well over 1000 MRAPs, but it's going to take longer than previously anticipated. Can management do anything about it? NO. This is 100% customer driven, and understanding the risk associated with FRPT, includes understanding the customer.

At these levels, FRPT is a very STRONG BUY, because the company continues to solidly perform, and ultimately, the customer will deliver (just not as fast as expected).

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:


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