Here we go again.
Several years ago, as the Pentagon wandered into a full scale shooting war against insurgents in Iraq -- just weeks after it had "Accomplished" the "Mission" of beating Saddam Hussein's Iraqi Army -- U.S. forces were flummoxed by improvised explosive devices (IEDs). How do you maintain order (and supply lines) in a country when anytime you try to go anywhere, the road under you suddenly explodes?
Solution: Build massively armored heavy trucks -- mine-resistant, ambush-protected trucks -- that can withstand the blast of the biggest IED. Facing rising casualty figures, the Pentagon sounded "all hands on deck," and asked the nation's defense contractors to build as many MRAPs as possible, as quickly as possible, to save soldiers' lives.
It worked. Defense contractors like General Dynamics
And a new problem discovered
Problem is, MRAPs are big, and not particularly graceful. While they work just fine traveling the highways and byways of Iraq, they're not well suited to the mule tracks that pass for interstates in Afghanistan -- which is where U.S. troops are going next.
With Iraq semi-quiescent, President Obama says the military's next mission is to shift troops to the theater they should've focused on in the first place: Afghanistan. At last report, at least 17,000 new troops have been tasked to support the more than 36,000 US troops already in-country -- troops that are right now contending with the very same IED issues that plagued us in Iraq.
To counter the problem in its new context, the Pentagon has asked its contractors to come up with a new version of MRAP -- "MRAP lite" in common parlance, or "M-ATV," the all-terrain MRAP. The Pentagon began asking contractors to place their entries for the new category of armored vehicle back in November. Last week, the Pentagon narrowed the field of contenders to just five companies, and asked each one to provide it with three prototype M-ATVs to test. And the winners are:
- Force Dynamics -- the joint venture between Force Protection and General Dynamics
- BAE Systems
- and BAE Systems again (not just because we love 'em twice as much, but because both BAE Global Tactical Systems and BAE U.S. Combat Systems offered prototypes)
What's it mean to investors?
Quite a lot, apparently. From the numbers being bandied about, this could be the biggest new ground warfare program since the JLTV contracts that were awarded to General D, Navistar, and Lockheed Martin
Most contestants agree that the total M-ATV program will max out at somewhere between 2,000 and 10,000 units. Full-blown MRAPs can cost upwards of $500,000 apiece, and while a smaller variant could cost less, the increased functionality of the M-ATV could just as easily make it cost more than a regular MRAP. In short, we could be talking $5 billion in contracts here. Recently, just the rumor that Navistar might miss out on this loot knocked the stock for a loop.
When the identities of the five finalists were released last week, it sparked a buying frenzy. So far, the biggest beneficiaries are the two companies posing the greatest bankruptcy risks: debt-laden Oshkosh – up almost 20%, and Navistar -- up 13%. In contrast, the more solvent BAE and General D have booked only minimal gains, while Force Protection -- arguably the company with the single best balance sheet of the bunch -- is actually down over the past week.
So where's the trade here?
Honestly, Fools, I don't know. With the exception of Oshkosh, each of these companies profited mightily from the last round of MRAP contracts -- although the Pentagon did seem to favor Navistar and BAE in the later rounds. In the subsequent JLTV program, each of General D, BAE, and Navistar won contracts, with Force joining Oshkosh in the losers' circle.
Logically, therefore, you should place your bets on the Pentagon's pets to win MRAP-Lite as well. This argues in favor of buying Navistar (which I've been recommending since before M-ATV was a glimmer in Secretary Gates' eye) or General Dynamics (which sells for just eight times free cash flow, and offers a compelling bargain in its own right). Globe-trotting investors might also want to give BAE a look-see -- although I fear they'll find the price a bit steep.
Am I 100% certain that the three companies who've won Pentagon favor in the past will walk off with M-ATV wins this time around? Hardly. (And in fact, my own investments in this sector are not bets on M-ATV at all, but rather based on valuation and balance sheet strength.) But if I were to bet on M-ATV and M-ATV alone, the odds seem to favor these three: BAE, General D, and Navistar.
As always, you invests your money and you takes your chances.
More reading for those who love to invest in stuff that makes other stuff go "boom":