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Force Protection: So Cheap, So Many Questions

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Christmas came early for Force Protection (Nasdaq: FRPT  ) shareholders this week, but it wasn't "Santa Claus" bringing the goodies this time -- it was Father Christmas.

Over in Merry Olde England, the Ministry of Defense has confirmed what Force told us just a few weeks ago: Notwithstanding stiff cuts in defense spending that have pared the order book for, for example, Lockheed Martin's (NYSE: LMT  ) F-35 fighter jet (but spared Boeing's (NYSE: BA  ) C-17 transports), Force Protection's recently won contract to build Ocelot armored cars for the British Army is going ahead full-speed. (Trivia note: What's an "Ocelot?" It's a species of South American cat -- sort of a mini-leopard.)

And now for the best news: This South American cat is going to put a whole lot more cash in Force's kitty, than we initially thought.

Guesses and facts
When first writing about this contract, I posited a $500,000-per-unit price for the Ocelot, in line with what Force's other MRAPs have historically sold for. Best case, I estimated the armored buggies might bring in about $770,000 apiece -- the going rate for a version of the Ocelot being shopped to the Australians under the Protected Mobility Vehicle -- Light moniker. So imagine my surprise when the contract-confirmation press release issued this week, and informed us that the UK will actually pay $280 million for its first batch of 200 Ocelots -- $1.4 million each! (Including parts and services.)

With deliveries beginning in H2 2011, and running through early 2012, this contract should secure about 20% of Force's usual annual revenues in each of these years. A second tranche of 200 Ocelots, if an order for same materializes, could even add growth to Force's revenue stream in 2012 and beyond. And of course, if Australia comes through with its proposed 1,300 order for PMV-L Ocelots, and if their cost, inclusive of parts and service, rises to around what the UK is paying, then that would of course be wonderful news.

The problem, to my mind, is the number of "ifs" that keep cropping up in this investment thesis. Beating out established armored vehicle makers like Oshkosh (NYSE: OSK  ) , Textron (NYSE: TXT  ) , and General Dynamics (NYSE: GD  ) is great -- don't get me wrong. And I do love it when an underdog wins. But what Force really needs to do is to secure its revenue stream with dependable, profitable, recurring revenues from services & upgrades.

That's where the company failed last quarter. That's where it needs to succeed going forward.

Where are the best values in defense stocks today? Find out here.

General Dynamics is a Motley Fool Inside Value selection, but Fool contributor Rich Smith does not own shares of any company named above. The Motley Fool has a disclosure policy.

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