Mine-resistant, ambush-protected armored vehicles from Force Protection (Nasdaq: FRPT ) were built to "take a lickin' and keep on tickin'." And boy, oh boy have they ever taken a beating this week.
On Monday, the company's shares led the general market rout, beating a retreat at flank speed -- down 13% on the day. This morning, Force recaptured some lost ground, reinforced by a platoon of investment bankers from Collins Stewart. Citing the stock's "13.3% pullback" Monday, Collins declared that now's the time to double down on Force's chances of winning the Pentagon's vaunted "M-ATV" armored vehicle contract to produce all-terrain MRAPs for the USMC and Army.
Collins Stewart? Why does that name sound familiar?
I'll give you a hint. Collins Stewart is the same analyst that downgraded Force back in January, worrying that investors were taking the company's winning the M-ATV competition for granted. With the stock having doubled in price over two months' time, Collins suggested investor enthusiasm had gotten a bit ahead of itself, and the price was too high as well.
Of course, at the time, the stock was selling for a little under $6 a share. Today, it's north of eight bucks -- and was selling for $7.50 just before the upgrade. Hmm.
The song remains the same
So what's changed about Force Protection between then and now? Well, there was May's news that the Pentagon had selected its short list of firms asked to build M-ATV prototypes for consideration. Force made the cut, of course, allied with longtime MRAP partner General Dynamics (NYSE: GD ) . But so did Navistar (NYSE: NAV ) , Oshkosh (NYSE: OSK ) , and BAE Systems -- which was actually asked to prepare two M-ATV variants.
But seeing as these firms were always considered the leaders in the M-ATV race, I can't say as Force's odds have improved all that much. To the contrary, if M-ATV is awarded as a sole "source contract" (i.e. winner-take-all) then Force had a one-in-five chance of winning the contract before, and it has a one-in-five chance today.
Regardless, after taking some time to crunch the numbers, here's how Collins Stewart looks at the situation today:
- A win by the Force-General Dynamics team ("Force Dynamics") would mean billions in additional revenues for the partners -- and in Collins' opinion, about a 100% run-up in Force Protection's stock price.
- On the other hand, should the Pentagon choose anyone other than Force Dynamics to build its new armored toy, this would reduce Force's value (again, in Collins' opinion) by "30% to 35%" to about $5 a share.
Hit me baby, one more time
Well, call me a glutton for punishment -- but if Collins' numbers are right, I wouldn't be too distressed if Force Protection lost the M-ATV contract rather than win just a part of the pie. Sure, the best result of all would be for Force Dynamics to land the entire contract, split the proceeds with General D, and hand us shareholders our 100% profit, thank-you-very-much.
But on the other hand, right now, we're looking at just a 20% chance of Force winning the whole shebang. Moreover, the people on the other 80% of the equation include Navistar and BAE Systems, two contractors whom the Pentagon chose over Force again and again back during the original MRAP production spree. (On the third hand, MRAP was allotted under President Bush's administration -- by the same people who picked Europe's EADS and Northrop Grumman (NYSE: NOC ) over Boeing (NYSE: BA ) and United Tech (NYSE: UTX ) to build the Air Force's KC-X Tanker. It's possible that an Obama administration would prefer to spend its M-ATV money here at home.)
M-ATVs? We don't need no stinkin' M-ATVs
Still, Force's chances of taking all the loot look slim. So let's consider instead what Force looks like without M-ATV. Assuming Force wins nothing, we're still looking at a company:
- Generating $34.9 million in annual free cash flow juiced through upgrades and servicing costs.
- Armed with $120 million in cash, and no long-term debt whatsoever.
- Or, in other words, an enterprise valued at just 13 times its cash profits.
Analysts tell us they expect Force to post 20% long-term growth in its profits. While we do not know for certain what assumptions are baked into this belief, or whether any part of it depends on Force winning a piece of (or all of) M-ATV, it seems to me that any analyst taking a win "for granted" on 1-in-5 odds would be courting a pink slip if he's wrong.
Conversely, if Force can grow its profits just through selling suspension upgrades and ForceArmor add-ons, and generally keeping the tires inflated and the oil changed on its existing MRAP fleet -- well, that's a business I sure want to own. (And I do.) Moreover, if Collins is right, and an M-ATV contract loss could knock $3 off of Force's share price, and make it even cheaper than it is today, well, obviously, I'd like that even more.
Listen, folks. I understand the appeal of investing in a "story stock:" the prospect of buying a stock on Monday, seeing it win a contract Tuesday, and counting your profits on Wednesday. But the plain fact is that Force doesn't need to win M-ATV to provide long-term investment success. Looks to me like it's doing just fine operating as a military Jiffy Lube to MRAPs-past.
Not as sexy as a contract win, I admit. But if Force can make a buck at it, it suits me just fine.
Victory through superior defense investing: