Osama bin Laden is still dead. But despite trillions of dollars in planned Pentagon spending cuts, Force Protection (Nasdaq: FRPT ) remains very much alive.
That's the short version of the Q1 earnings report Force released Monday. Here's the longer version:
- Revenue rose 5% to $141 million.
- Profits didn't. (In fact, there were no profits this time around.)
- But Force still has a future, because it's got $501 million worth of backlogged work to be done, and Congress has authorized funding for all of it.
Force slims down
At present revenue rates, that's enough to keep Force humming for nine months before it needs to find new work to do. What's more, CEO Michael Moody assured investors that when combined with $200 million worth of contracts already won in Q2, Force should post improved revenue and profit for the full year, and in years to come. That said, it's clear that U.S. defense spending is on the wane, and management's not sitting around waiting for crunch time. Instead, Force is retrenching, laying off labor it no longer needs -- and incurring severance and restructuring costs in consequence.
Nor are payrolls the only things shrinking. In a sign of confidence in the future, Force is also shrinking its share count, spending $1.1 million to buy back 228,125 of its shares last quarter -- a pretty good investment, with the shares having risen recently to $5.05 today. It's promising to invest as much as $20 million more in similar share purchases as good prices present themselves.
Trust the Force
Will this bet pay off as well as the last one did? Perhaps. Having already won the $280 million contest to build Foxhound (nee "Ocelot") armored cars for the U.K., Force continues to contend for $2.3 billion worth of armored vehicle contracts on offer by the governments of Canada and Australia, with "hundreds of millions of dollars" more in Pentagon contracts up for grabs.
Winning won't be easy -- rival defense contractors Textron (NYSE: TXT ) and Oshkosh (NYSE: OSK ) , General Dynamics (NYSE: GD ) and Navistar (NYSE: NAV ) , and even Lockheed Martin (NYSE: LMT ) are certain to make swipes at the dwindling defense budgetary pie. Many of these firms have seen programs or product lines approach the chopping block as well recently. Expect the competition to heat up. And with many of these firms holding more dominant positions within the defense industry, Force Protection should have its work cut out for it. At a valuation of just 13.4 times free cash flow today, just one major contract win could restart Force's growth engine, and reward investors for their patience.
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