Force Protection's Indefensible Leap

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Are Force Protection (Nasdaq: FRPT) investors really good at remaining optimistic, or just really bad at math?

That's the question that faces us in the wake of Force's surprising 5% jump in market cap, a reaction to Monday's news that the company has landed a $52.8 million order to provide the U.S. Army's Tank-Automotive and Armaments Command (TACOM) with 48 of its mine-sweeping Buffalo MRAPs.

On the one hand, the news seems decidedly bullish, in that:

• While $52.8 million would be pocket change for a big defense contractor like General Dynamics (NYSE: GD), Lockheed (NYSE: LMT) or Raytheon (NYSE: RTN), it ain't exactly peanuts for a $400 million company like Force ...
• ... and Force says it fully expects this order to double in size as the Buffalo program progresses, growing into a 100-vehicle order and perhaps $110 million in revenues over the course of fiscal 2010.

And yet, when you consider that Force earns far less on its sales than do the rivals named above -- only about a 4.1% profit margin -- even $110 million in sales only works out to about $4.5 million worth of profit. So why, pray tell, did Monday's news result in a $22.4 million rise in market cap for Force? I have to tell you, folks, I'm a Force investor myself, but even I don't see a whole lot of logic to investors' actions here. That is to say, unless ...

Unless?
Unless Force's market cap had already been beaten down too low on unreasonable fears that the company was going bye-bye. After losing back-to-back megacontracts to rivals Navistar (NYSE: NAV) and Oshkosh (NYSE: OSK) in recent months, a lot of pundits were saying "the force [was] weak with this one." Even if they weren't exactly expecting the company to go bankrupt, they seemed to be pricing in that possibility.

To my mind, therefore, investors' actions over the past couple of days probably speak more to their renewed confidence in the company's viability than to any direct profit-to-market cap relationship. And if that's the case, then I must agree with them.

Consider: Right now, Force Protection's shares sell for a mere 0.4 times annual sales -- a valuation lower than almost any defense contractor you can name, and essentially on par with Textron (NYSE: TXT). Yet whereas Textron is burning cash and burdened by in excess of $9 billion in net debt, Force generates copious free cash flow and sits on a treasure trove of $120 million cash.

The more I work the math, the more I agree with my fellow Force investors today. This stock should go up. The numbers compel it.