After a slight Q3 stumble, Armor Holdings
What analysts say:
- Buy, sell, or waffle? Eleven analysts say "yes." Literally every single analyst following the company rates it a buy.
- Revenues. Stewart & Stevenson's sales streams flooded Armor Holdings' coffers once again last quarter. Estimates call for an 89% jump in revenues to $841 million.
- Earnings. Even so, profits are predicted to be flat at $1.11 per share.
What management says:
CEO Robert Schiller left himself open to interpretation with his sound-bite assessment of last year, and last quarter: "We are pleased to have finished fiscal 2006, a truly transformational year, with a strong fourth quarter performance." But whether it was the strong finish to the year (quarterly sales up 77%, including 31% organic sales growth), or the simple escape from a very busy year in which Armor Holdings essentially doubled in size, that pleased him most was not clear. Perhaps he meant a little bit of both.
What management does:
It's pretty clear why Stewart & Stevenson's added revenues would please Schiller. For the story on why they might not, see below. Several times in the course of last quarter's earnings release, Schiller mentioned how S&S "operates at lower average gross margins" than did the pre-merger Armor Holdings. The effects are plain to see: The more post-merger results incorporated in the combined firm's trailing-12-month numbers, the farther the gross (and operating, and net) margins fall.
|
9/05 |
12/05 |
3/06 |
6/06 |
9/06 |
12/06 |
|
|---|---|---|---|---|---|---|
|
Gross |
24.1% |
23.9% |
23.6% |
22.2% |
21.2% |
19.6% |
|
Operating |
14.4% |
14.8% |
14.8% |
13.6% |
12.0% |
10.3% |
|
Net |
8.0% |
8.1% |
8.3% |
7.4% |
6.7% |
5.7% |
One Fool says:
When will Armor Holdings begin to capitalize on its new acquisition and start transforming its sizeable revenue streams into accretive profits? Guidance from the fourth-quarter news release suggests we won't have to wait long. After pulling down $3.65 per diluted share in profits last year, Armor Holdings expects to milk its approximately $3.5 billion in fiscal 2007 sales for roughly $5 per share in earnings. Granted, this would make for slower profit growth than the anticipated sales growth, but that's the price you pay for lower margins.
More important than the GAAP net earnings, though, is Armor Holdings' free cash flow -- its actual cash profits. Ordinarily, free cash flow is a tricky beast. It ebbs and flows depending on working capital requirements, expenditures needed to keep the existing business running, and investment in building the business. So investors should make careful note of one tidbit that Armor Holdings offered last quarter: In 2007, it expects free cash flow of $100 million.
That sounds disappointing because it's lower than last year's number. But Armor Holdings also confided that as much as $120 million will be spent on capital expenditures "for expansion of our medium vehicle capacity and a ramp up of our capability to implement LTAS for the FMTV, expanded ballistic materials manufacturing capability and additional capacity for production of the M1151/52 and certain soldier equipage products." In other words, "expansion capex" that, if not spent, would translate directly to free cash flow, and yield cash profits more than double what the firm generated last year. My read on this, therefore, is that the firm is profiting just fine after its merger.
FMTV? LTAS? If you like acronyms -- and you'd better if you're investing in defense contractors -- you'll love Armor Holdings' cooperation with Lockheed Martin
Fool contributor Rich Smith does not own shares of any company named above.
