Two years ago, when previous Motley Fool Rule Breakers recommendation Force Protection (Nasdaq: FRPT) seemed to be falling apart at the seams, I took the opportunity to kick the company while it was down.
I criticized its unprofitable alliance with General Dynamics (NYSE: GD). I blasted the company's inability to put together a halfway-reliable 10-K filing. I even gently ridiculed the decision to select a new CEO drawn from the insurance industry.
And I was wrong.
Fallback positioning
At least on that last point. Not all insurance execs are risk-hungry idiots like the folks at AIG (NYSE: AIG). Some, like Berkshire Hathaway (NYSE: BRK-B) CEO Warren Buffett, are efficient allocators of capital, smart judges of risk and reward, and masters of many trades beyond the insurance biz itself. Judging from the earnings report that Force Protection put out earlier this week, CEO Michael Moody may be one of the good 'uns.
As I described a few months back, after making one last, ultimately doomed attempt to find buyers for its white-elephant-of-a-Cheetah armored vehicle, Moody finally threw in the towel and admitted that Force Protection is outclassed in the competition for big-ticket Pentagon weapons systems. He seems to have acknowledged that there's no "percentage" in going head-to-head with the likes of BAE, Navistar (NYSE: NAV), Lockheed Martin (NYSE: LMT), and Boeing (NYSE: BA).
Instead, Moody restructured the company, rolled back Force's manufacturing infrastructure, and focused on the company's core strength in innovating new defense technologies -- on transforming Force into, as he termed it, "a full-service survivability solutions provider."
Maneuver warfare
His strategy is working. According to this week's report, Force grew its revenue roughly 19% last year (excluding last year's profit margin-less "pass-through sales" to General D -- see above.) The company cut capital spending by nearly a third, reduced inventories 16%, and maxed out cash production in its new asset-lite business model, generating $38.3 million in free cash flow last year -- an 85% increase over the 2008 figure.
As a result, while 2009's "profits" (as GAAP accounting defines the term) may be down, cash levels are actually up (to $147 million.) When you net out the firm's vast cash reserves, the business Moody has salvaged now "sells" for just $318 million, versus better than $38 million in annual cash production -- an enterprise value-to-free cash flow ratio of just 8.3.
Anyone want to bet that Force can't grow fast enough to justify this valuation? Well, don't. With this particular insurance exec at the wheel, that's a risk you don't want to take.
Its business success notwithstanding, Force Protection's stock has lagged the market badly over the past year. How do you tell a bargain stock from a value trap? Find out here.
