No Love for Force Protection

When a firm that sold $260 million worth of goods and services over the last year gets awarded a contract worth 85% of that sum -- $221 million -- in a single day, how would you expect the stock to react? Should it double? Jump 85%? Maybe a more modest 10%?

If you guessed any of the above, you're wrong. The company in question is cutting-edge armored vehicle maker Force Protection (Nasdaq: FRPT  ) . And when it announced the aforementioned contract on Wednesday, its stock dropped 8% in half an hour's time, and has stayed down ever since. To understand why, you have to know the context.

The company
Force Protection makes a series of unique, V-shaped-hulled armored vehicles that are designed with the express purpose of warding off Iraqi improvised explosive devices (IED) attacks. To date, its "Cougars" and "Buffalos" operating in Iraq have suffered not a single casualty among the soldiers traveling within them. Both series of vehicles are what the military calls "MRAPS" -- mine-resistant ambush-protected vehicles.

The prize
According to figures cited by management, Force Protection is angling for as big a piece as possible of an anticipated 18,000 MRAPs desired by the U.S. military. Prior to Wednesday, the firm had notched one big win -- an April contract to build 1,000 MRAPS for $490 million. Earlier this month however, the stock was shaken to its foundations when a previously discounted contender in the MRAP race, Pink-Sheeted truck maker Navistar International, won the second major contract award to build 1,200 MRAPS for $623 million.

That news sparked a sell-off in Force Protection's stock -- a sell-off that by all rights should have stopped and reversed itself when the news broke that it won the third major MRAP tranche in the form of a U.S. Marine Corps order to buy 455 MRAPs for $221 million. Judging from the chatter on various discussion boards concerning the company across the 'Net, though, I suspect that at least one reason Force Protection's stock took such a hit, and hasn't bounced back, is that investors expected their company to win an MRAP order at least twice as large.

At this point I should probably make it clear that "MRAP" is a generic term referring to any number of different armored vehicles manufactured by various defense contractors. Those of you who scored high on your SAT verbals can think of it like this: "Corvette, Focus, and Prius are to car, as Cougar, International MaxxPro, and Charger are to MRAP."

Hold up. What's a "Charger?"
I'm glad you asked. You see, that's the second reason the stock isn't bouncing back. No sooner had Force Protection announced its own win, than sometimes-partner, sometimes-foe General Dynamics (NYSE: GD  ) announced an MRAP win of its own -- and this is a party to which Force Protection was not invited.

The order was small -- just 44 RG-31 Mk 5 (pronounced "Mark Five") Chargers for a purchase price of $19.9 million. Even so, the fact that General D managed to land this order on its own, apparently without help from Force Protection, seems to put the lie to another theory prevailing on the Internet chat boards: That General Dynamics "needs" Force Protection in order to win MRAP orders and get its own slice of the pie.

To the contrary, the Charger order suggests that General Dynamics can do just as well -- and has no compunctions against -- working with other partners to secure high-margin portions of the MRAP lucre. Wednesday's announcement revealed that General D's Land Systems-Canada subsidiary would "provide program management" (which sounds like pretty high-margin -- and low fixed-cost -- work to me) on the Charger contract. The actual building of the vehicles will be conducted by its partner on the project, Britain's BAE Systems (soon-to-be-owner of another Force Protection partner, Armor Holdings (NYSE: AH  ) .

While hardly a mortal threat to Force Protection's business, the complicated MRAP-building relationships swirling around General Dynamics suggest that many parties will be collaborating to build MRAPS, each taking a share of the profits. That means Force Protection will have to do a lot more sharing of revenues than its investors may have bargained for.

Speaking of which
You may also have noticed a related, but non-MRAP, piece of news that came out Thursday morning. This one concerns a company, Textron (NYSE: TXT  ) , that was in the running for MRAP contracts, but got booted by the military -- presumably because its offering, a modified version of its M1117 Guardian Armored Security Vehicle, was not up to snuff for MRAP status.

On Thursday, Textron announced a $255.5 million contract to provide the U.S. Army with 369 Guardians. On the one hand, these vehicles aren't MRAPs, so they don't directly subtract from the 18,000 vehicle-pot of gold that Force Protection is targeting. Even so, the fact that the Army is spending a quarter-billion dollars on Guardians means its defense budget now has a quarter-billion dollars less to spend on MRAPs. If you've noticed that the U.S. government isn't exactly swimming in budget surpluses these days, you have to take that as a cautionary note for future MRAP orders.

Foolish takeaway
Taken in isolation, none of the above news releases poses a serious threat to Force Protection's business. Taken as they were given though, one-after-the-other-after-the-other (and don't forget the stories yet to come -- further news on Ceradyne's (Nasdaq: CRDN  ) new BULL, or whatever Oshkosh (NYSE: OSK  ) has up its sleeve), I think they explain why Force Protection's stock is playing duck and cover this week.

For further Foolish musings on investing in defense companies, read:

Fool contributor Rich Smith does not own shares of any company named above. The Fool's disclosure policy can withstand any attack.


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