Investors in Force Protection Inc. (FRPT) were eagerly awaiting the company’s earnings report when the market closed on Monday. After trading in a range between $4.00 and $5.00 for eight months, the company was overdue to report some positive news. The release did not disappoint and by the time the market opened Tuesday morning, buyers were falling all over eachother to get their hands on the stock.
Force Protection is a manufacturer of armored vehicles and other products that increase survival rates on the battle field. With the United States and a number of allies in a sustained war against terror on several fronts, there is significant demand for FRPT’s products. This was made clear as the company announced revenue of$ 289 million which represents a 21% increase over the fourth quarter last year. Management attributed the increase to modernization, spares, and its sustainment business lines. Offsetting the strength was a lower number of vehicles which were shipped.
Initially, it might seem like a lower number of vehicles shipped would be a negative for the company. But a transformation is underway in which the company is broadening the number of products it offers which in turn is building a healthier business.
We are transforming our Company into a full-service survivability solutions provider. This effort was rewarded in 2009 with over $450 million in increased modernization, spares and sustainment revenue during the year. We have expanded our operational footprint and significantly improved our capabilities in this business. We are continuing our product development efforts to ensure that we are delivering the best balance of survivability, mobility and readiness to our end-users. We are also continuing to push forward in the area of new vehicle development. ~Michael Moody, CEO
Not only did the company produce higher revenue in the fourth quarter, but profitability increased sharply as well. The company earned 27 cents per share for the quarter (totaling 61 cents for the year) compared to 17 cents from the fourth quarter last year. Gross margins were higher as FRPT transitioned to products that offered better profitability, and general and administrative costs were also kept in check. In short, it was a strong quarter for the firm and investors now have a newfound confidence in the stock.
Gold Catches Traders By Surprise
Supplying military vehicles can be a difficult business. The revenue trends are unpredictable as governments can increase or decrease contracts almost at will. Research and development costs can be high and it is not always easy to recoup these expenses. That is why FRPT’s diversification in business lines will be such a strength for the company. Replacing parts for existing vehicles, modernizing those vehicles with the most up-to-date equipment, and providing other solutions will create a more stable revenue stream leading to a healthier company.
But that doesn’t mean Force Protection will abandon making vehicles all-together. Quite the contrary, FRPT has a new vehicle called the Ocelot which is currently being tested by the UK. As the prototypes are approved, FRPT should receive a good number of orders for new vehicles and it appears that there is a strong possibility that Australia could be a purchaser as well. New vehicles sent to the field will help to generate additional maintenance and parts business for the firm as well.
Looking at the financial picture, FRPT appears to be in a healthy situation. The company finished the year with cash reserves of $147.3 million – that’s equivalent to $2.00 per share. With no debt, this leaves FRPT with plenty of flexibility for developing products, making strategic purchases, or simply riding out the ups and downs of the order cycle. Management has paired down inventory levels as well which helps to increase the financial stability of the firm.
Whether you look at FRPT from an earnings perspective or a book value frame of reference, it appears the stock is attractively priced. Analysts appear to have very conservative estimates for earnings this year (pegged at 0.45 per share) and while there may be some bumps in the road, I believe FRPT can easily beat these numbers. Still as I write, the stock is trading at less than 15 times earnings which appears attractive considering the potential for growth and the financial stability.
Book value per share is roughly $4.44 considering cash, inventory, receivables and the company’s current liabilities. So the stock is trading at about 1.5 times book value or the price per share investors would receive if they simply liquidated the company. Since FRPT is actively growing value through positive earnings and a growth strategy, this price appears very conservative. I would recommend waiting for a bit of the excitement to wear off after the earnings announcement and then try to pick up shares near $6.50 if possible. The company is relatively small with a market cap of $460 million, but their profitability is proven and the long-term opportunity is exciting.
FD: Author does not have a position in FRPT
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