Well, the news is out. Expected to earn $0.12 per share in the third quarter, Force Protection (Nasdaq: FRPT) instead earned just a nickel -- and even that was "adjusted" profits. Under GAAP, the company lost money. Sales slipped 44% to $176 million. Investors promptly sold off the stock, although the pace of selling has since slowed. But, should it have?
Slowed, that is? I mean, the news was pretty grim:
- New orders: Middling. While management boasted of inking $675 million worth of new contracts so far this year, and says it expects to end the year with "well over $700 million" in new work, that's treading close to just breaking even with the company's trailing 12 months of revenue.
- Cash reserves: Diminishing. Cash, equivalents, and short-term investments dropped $15 million from the previous quarter.
- Free cash flow: Nonexistent. (In fact, Force Protection has burned through $40.2 million in negative free cash flow so far this year.)
- Profits: Evaporated. What little profit it might have earned was wiped out by a $8.5 million litigation settlement.
Keep hope alive
If Force Protection has a friend left in this world, it's probably named "Ocelot." In September, Force Protection confirmed its new armored car won the contest to become the U.K.'s new "Light Protected Patrol Vehicle" (LPPV) -- a contract I've estimated to be worth anywhere from $200 million to $300 million. A second Ocelot contract with Australia could follow (if Force Protection defeats competing products from Thales and General Dynamics (NYSE: GD)), and bring an even bigger bonanza. On top of all that, Force Protection is competing to win armored car contracts with the Air Force and the Canadian military as well.
Whatever the fate of the other competitions, it's important to note that despite recent British defense cuts which could do a number on other projects like Lockheed Martin's (NYSE: LMT) F-35, Force Protection's LPPV deal appears alive and well. Like General Dynamics, whose armored scout vehicle appears to have also escaped cuts, and like Boeing (NYSE: BA), whose C-17 transport remains on Britain's shopping list, Force Protection confirmed that the U.K. still intends to buy the LPPV -- and it's still in line to collect those revenues.
Let them eat cake
Now, it would be great to see Force Protection win an armored car contract or two, of course. But this was supposed to be the icing on Force Protection's new-business-model cake. The "cake" of this investment idea is supposed to be that Force Protection could do business consistently, profitably, just servicing the armored vehicles it's already built. If it's starting to fail at that mission, the stock will soon become a sitting duck for short-sellers.
Are there more defensible defense deals out there today? You bet there are. Find 'em here.
