Fool on Call: Force Protection Projections

What to do with Force Protection (Nasdaq: FRPT)?

The question's bound to be on shareholders' minds (I know it's on mine) after Friday's 12% jump in price. In slightly more than a year, Force's stock has plunged from a peak price around $30 to within a whisker of a buck. Ouch. Now that it's tripled off of its March bottom, investors have to be wondering if now's the time to get out before things go bad again.

So? Is it time?
Fair question. After reviewing the situation in my April column "MRAP Madness," I concluded that Force had about equal chances of going broke or coming back strong. For the latter scenario to bear fruit, the company had to get a couple of things done: Finish its SEC filings and land some contracts to shore up its revenue stream.

A month and a half after that column ran, Force Protection gave us an update in a conference call Thursday. So let's see what progress it has made.

Talk is cheap
Force's last conference call, the one that inspired "MRAP Madness," struck me as an exercise in wishful thinking. Force was working on fixing its accounting. It expected to land contracts to "remanufacture" Cougar MRAP vehicles for the Marines. It hoped to sell someone (anyone?) its new Cheetah armored vehicle. It intended to compete against everyone from Boeing (NYSE: BA), to Oshkosh (NYSE: OSK), to Lockheed Martin (NYSE: LMT), to Northrop Grumman (NYSE: NOC) for a slot in the Army's JLTV program. Suffice to say, I was less than impressed with the talk -- but willing to give Force some time to deliver on its promises.

And action?
So far, no such luck. The filings still aren't finished, and while Grant Thornton is working on the books, management could not say when everything will be squared away. The JLTV contracts haven't yet been awarded (but Force partnered with DRS Technologies (NYSE: DRS) on its bid). Nor do we have any remanufacturing contracts or Cheetah sales.

And yet ... somehow I came away from this call feeling much better about Force than last time around. Why? Management convinced me that it's not the one-trick pony that some analysts have labeled it. This pony has quite a few more tricks stashed in its saddlebags -- enough to make the stock a bargain.

Talk is cheap, but so is the stock
Among the many numbers bandied about last week, two stood out. First, Force expects to generate revenues of $150 million per year servicing vehicles it has already built. (On Friday it reported winning one such contract from the Marines.) And while the U.S. military seems intent on buying smaller MRAPs from Force's rivals, Force also expects to sell about $100 million a year in mine-clearing Buffalo megaMRAPS.

Of ponies and Cougars
Add just those two numbers, and you've got annual revenue worth $250 million. Now, the going rate for defense-contractor market caps is roughly equal to those contractors' sales, on average. If all Force can muster are the two revenue streams described above, it should sport a market cap of about $250 million. (Note that these are funds coming from Force alone. Management made a point of separating out its own business from that shared with partner General Dynamics (NYSE: GD)).

But those two streams are not all. Unlike the reticent U.S. military, foreign buyers continue to ante up for Force's Cougar MRAP. The company has landed a couple of $100 million-plus contracts in just the first half of this year. While there's no guarantee it will continue to win business at this rate, management "expects" this, and is actively seeking to win more orders from abroad. 

It is hard to put a price tag on "expected" Cougar orders, but I'm guessing that this revenue stream is worth at least another couple hundred mil in market cap. To my mind, this makes Force perhaps a $450 million company, based on the probable and possible revenue discussed so far.

Wild cards
Now for the wild cards: There's JLTV, of course -- a multibillion-dollar opportunity that Force probably won't win. (But it might.) Force may also be asked to remanufacture some or all of the 3,000-plus MRAPs it has already built. According to management, this is what the Army did with its Abrams tanks after previous conflicts. Once peace broke out, the tanks were pulled from the field, overhauled, and improved to incorporate the latest technology. Force believes something similar will happen with the MRAPs.

Finally, management confided that the slowdown in MRAP orders has allowed it to spend more time on research and development, and that it is back at work developing new technologies. While presumably not as lucrative as building entire vehicles, management's talk of such arcana as bomb-resistant wheels suggests Force Protection possesses potential revenue streams as-yet unguessed. 

I won't even hazard to guess how much value these wild cards add to the company. But what I can guess at suggests that Force's stock has room to build on its recent triple, and perhaps double again.

That is, assuming it's not all just talk.