Dude, Where's My MRAP?

As Stephen Colbert might put it (were he still on the air): "The market has spoken. Bigger really is better."

On Wednesday, the market, in the form of Pentagon procurement officers, spoke decisively. It seems to favor giving crucial defense contracts for the production of "mine-resistant, ambush-protected" (MRAP) armored vehicles to big defense contractors, rather than their smaller brethren. Here's what it said:

  • Contracts to produce 3,126 "mine-resistant, ambush-protected" (MRAP) armored vehicles for the U.S. military were allocated among three (or seven, depending on how you count them) defense contractors.
  • Navistar will receive $1.1 billion to manufacture 1,500 Category I (Cat-I) MRAPs.
  • 1,268 larger Cat-II MRAPs will come from Britain's BAE Systems and its recently acquired Armor Holdings subsidiary (also a $1.1 billion order).
  • Meanwhile, the little company that started this whole MRAP craze, Force Protection (Nasdaq: FRPT  ) , has been asked to provide a mere 178 Cat-I's and 180 Cat-II's. As usual, Force will call on partner General Dynamics (NYSE: GD  ) to help with the actual production, relinquishing half of the $378 million purchase price.
  • And the other six MRAPs, and the other two contractors? As I'll discuss in a separate column, this refers to a new MRAP variant, called the "BULL," which Ceradyne (Nasdaq: CRDN  ) and its partner Oshkosh (NYSE: OSK  ) are building for further tests.

Bigger is better
What's it all mean for Force Protection? As of this writing, the company has the dubious distinction of being the worst-performing recommendation not yet sold from the Motley Fool Rule Breakers portfolio.

In my opinion, yesterday's move proves that the military has decided "bigger is better." Look at the two winners in this most recent mega-award, and you'll find two commonalities. Navistar's $12 billion in annual sales, and BAE's $26 billion, both dwarf tiny Force's half-billion annual take.

Second, their scales of operations and manufacturing capacities are similarly large. And as we discussed last week, the way the Pentagon has been running the competition to choose "the next Humvee" strongly suggests that the military prefers to give super-big contracts to super-big companies. Ideally, companies that the Pentagon has worked with for decades, and whose vehicles military mechanics know how to service. With long histories of building trucks and tanks for the Armed Forces, respectively, Navistar and BAE were both logical choices in this regard.

But what about General Dynamics?
I'm afraid I'm as stumped as you are. If the military wants scale and familiarity in a contractor, the General seems just as big as BAE. And as the maker of the military's Abrams tanks and Stryker APCs, it's arguably as familiar a partner as any defense company on the planet. Why it got stiffed along with its partner, Force Protection, is beyond me.

So this is the end?
The situation does not look good for Force Protection. Whenever a contract comes up for award lately, the Force seems to get short shrift from its No. 1 customer. When you recall that this company has historically been a "storybook stock" -- driven by hype and momentum, with little regard for valuation -- it's clear why the stock looks like it's just lost an argument with an explosively formed penetrator. People used to think Force would own the MRAP market; now we know that just ain't so.

But before we write off Force entirely, let's pause for a moment and consider the valuation: I wrote recently that by and large, U.S. defense contractors typically command a share price of about one times sales. As of this writing, Force is selling for two-thirds this "standard" valuation.

Meanwhile, headlines aside, analysts still predict that Force will grow its profits at two to three times the rate of defense-contracting behemoths like Northrop Grumman (NYSE: NOC  ) , Lockheed Martin (NYSE: LMT  ) , or Textron (NYSE: TXT  ) . Those sales, by the way, do not depend entirely on a U.S. government that now seems to obey the "bigger is better" philosophy of shopping. Force also makes and sells MRAPs to foreign buyers, ranging from the U.K. and Italy in the West to Iraq and Yemen in the Middle East.

Between less-than-hoped-for sales here at home, and perhaps more-than-understood sales abroad, I still see a future for Force. Maybe not as bright as others once saw for it, but bright enough that I picked up a few shares of my own a few weeks back. And yes, with today's even cheaper stock price, I just might be in the market for some more, once the Fool's 10-day cooling-off period expires.

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