What's that up in the sky? Is it a bird? A plane? No, it's Armor Holdings (NYSE:AH), circling in a holding pattern, preparing to land and deliver an armored-helicopter-load of Q2 2006 earnings news on the morrow.

What analysts say:

  • Buy, sell, or waffle? Nine analysts follow Armor Holdings, where buy ratings outnumber holds seven to two.
  • Revenues. The proud owner of Stewart & Stevenson Services since May 25, Armor Holdings is expected to show a huge sales gain in comparison to its S&S-less sales of yesteryear. Analysts predict a 40% increase for a total of $520.8 million.
  • Earnings. The acquisition didn't come cheap, though. Back in February, Armor Holdings President Robert Schiller advised that the S&S deal would not be "accretive to earnings" until 2007. Truer words were never spoken. Analysts predict Armor Holdings will see its earnings fall 15% this quarter. $0.89 per share is the target.

What management says:
Armor Holdings has put out a flurry of filings with the SEC in relation to its latest acquisition. Most of these concern the financing it took out to do the deal. But two filings stand out as more useful to the individual investor.

In this one, management lays out where its revenues will be coming from in this and future years. About 3% will derive from aerospace contracts this year; another 18% from individual equipment (body armor). 35% of sales will be to original equipment manufacturers, but the bulk of sales (44%) will come from contracts to "armor-up" ground vehicles -- mainly for the U.S. Army, the source of 85% of Armor Holdings' revenues.

Here, management lays out its combined post-acquisition earnings, assets, and so on. This shows that the new Armor Holdings earns roughly $109 million on $2.4 billion in sales.

What management does:
Or rather, what it has done up to the point where it acquired S&S. Generally speaking, we have seen the company's margins compressed by the same kinds of rising raw material costs that have affected other manufacturers across the board. But operating and net margins have held up pretty well, considering the 350-basis point compression of the gross.

Margins %

9/04

12/04

3/05

6/05

9/05

12/05

Gross

27.1

26.1

25.4

24.1

23.9

23.6

Op.

15.8

15.8

15.2

14.4

14.8

14.8

Net

8.2

8.4

8.9

8.0

8.1

8.3

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
That said, two things concern this Fool about the "new and improved" Armor Holdings. First, the net profits from continuing operations reflected in the second SEC filing mentioned above show that the new business, with its 4.5% net margin, is barely half as profitable as it had been pre-merger. Second, the purchase will cost essentially all of Armor Holdings' nearly $500 million (at last report) in cash and equivalents, and will nearly triple its long-term debt to about $550 million. That leaves investors in possession of shares of a more highly leveraged company, earning fewer profits with which to pay off its debt.

Although the merger could still work out well in the long run, in the short term, investors should be looking for committed efforts to boost profits and pay down debt. With the merger still less than two months old, time's already a-wastin'.

Competitors:

  • Caterpillar (NYSE:CAT)
  • Ceradyne (NASDAQ:CRDN)
  • DaimlerChrysler (NYSE:DCX)
  • Halliburton (NYSE:HAL)
  • Oshkosh Truck (NYSE:OSK)
  • National Oilwell Varco (NYSE:NOV)

So why did Armor Holdings buy S&S if it was such a risky play? For one possible clue, read Chinks in Armor Holdings, where we discuss the dilemma of organic growth-gone-missing.

Fool contributor Rich Smith does not own shares of any company named above.