This is a great post that everyone in FRPT needs to read!
TheSteet.com Versus Force Protection Inc
One of the strangest match-ups in history has to be TheStreet.com versus Force Protection Incorporated. Force Protection is a military manufacturer that has grown very quickly from a 10.3 million a year stock on the OTC exchange in 2004 to a company that had revenue of over $200 million last quarter.
Force Protection manufactures military vehicles designed to protect the occupants from mine and IED explosions. These vehicles are typically called Mine Resistant Ambush Protected (MRAP) vehicles. Force Protection’s MRAP vehicles are the Gold Standard vehicle in Iraq and Afghanistan with a record of 3 deaths in 3000 mine and IED attacks. One of the soldiers killed was reportedly not wearing a seat belt and likely would have survived had the belt been worn. This is a very impressive record which no other manufacturer of MRAP vehicles can match.
Force Protection’s new MRAP vehicle is called the Cheetah. The Cheetah is a smaller and more maneuverable MRAP vehicle that is faster and has more range than does an up-armored Humvee. It is able to survive large IED and mine attacks that would destroy up-armored Humvees. Force Protection has been building a new factory for the Cheetah vehicles and expects to begin production of Cheetahs early in 2008. Currently, the military is testing the Cheetah which is the only small MRAP vehicle being tested.
Although Force Protection has not yet gotten an order for Cheetah vehicles, Force Protection believes that they will sell many of them. They expect to begin getting orders after the vehicle has undergone sufficient testing to prove its capability. The British military has also tested the Cheetah and is reported to be interested in the vehicle as are several other countries.
Force Protection currently has $72 million in cash as of the end of Q3 and has a $50 million line of credit that is currently unused. Force Protection’s market cap is $682 million and it has a PE of 16.6. The average analyst estimate is that Force Protection makes $1.45 in 2008 with revenue of $1.36 billion dollars. The forward PE is less than 7.
Although Force Protection provides a lifesaving vehicle to the military, it is still very small company. The small size, and fast growth have made it a favorite stock of both small retail investors and institutions who expect the fast growth to translate into fast growth of the stock but instead, Force Protection’s price is close to a 52 week low.
Even though Force Protection’s growth makes it seem an attractive buy to many, to those at TheStreet.com based on the coverage, it must be a “Most Hated” stock. The status of being a “Most Hated” Stock gives Force Protection exceptional coverage from TheStreet.com – unfortunately for Force Protection shareholders, the coverage is all bad! Looking at the headlines, at TheStreet.com, Force Protection gets more coverage than many large companies like Microsoft, Exxon, Intel, Cisco, Google, and just about any other large company that can be named.
So what is it about Force Protection that makes it a “Most Hated” stock at TheStreet.com? One might wonder whether they get exceptionally bad coverage anywhere else? The only other mainstream news organization that regularly covers Force Protection is Bloomberg. In the occasional mention on Bloomberg, it is clear that the view from Bloomberg is much different than it is from TheStreet.com.
The titles of Force Protection articles for the six weeks from TheStreet.com are illustrative:
Battle Wounds Worsen for Force Protection
Force Protection steps on a land mine
Cutback Report Shells Force Protection
Force Protection Fan Leaves Bull Herd
CEO's Outside Ties Choke Force Protection
Force Protection Hits More Bumps
Force Protection in Reverse
Navistar Shines in Mine-Resistant Vehicle Contracts
Downgrade Dents Force Protection
Force Protection's Wild Ride
Force Protection's New Battle
The coverage from TheStreet.com is not only negative but typically inaccurate and tends to use sources such as unknown web bloggers, analysts that don’t cover the stock, unnamed employees from competitors and etc. It is not necessary to read very far in any of the articles from TheStreet.com to find a mistake. In the latest article, the first paragraph has a factual error. The article indicates that Force Protection announced plans to secure financing for its brand new Cheetah vehicle. But this never occurred and is the latest example of major errors in the coverage by TheStreet.com.
One question that might be asked is how does TheStreet.com cover competitors of Force Protection? This question is interesting because the coverage of competitors and potential competitors of Force Protection get very favorable mention. The large competitors of Force Protection such as BAE and Navistar get very positive coverage with respect to MRAP and so has the smallest competitor, a company called, “Protected Vehicles Inc”. Despite the positive coverage from TheStreet.com, Protected Vehicles is going out of business.
Any balanced coverage of Force Protection will find that the company does have issues. Force Protection does not communicate very well with analysts and shareholders and needs to communicate better. Force Protection is a small manufacturer of MRAP vehicles with large competitors. They are dependant to a large extent on additional government contracts. The military is rapidly purchasing thousands of MRAP vehicles and will have completed the major part of the purchases probably in 2008. Force Protection’s future is largely dependant on contracts for its new vehicle the Cheetah. The Cheetah is a potential replacement for the up-armored Humvee.
Without Cheetah contracts, and if the military completes most purchases of MRAP vehicles, then Force Protection’s revenue would be mainly dependant on service revenue which might be $200 to $400 million a year with new manufacturing revenue perhaps on the order of $200 to $300 million a year. The military will likely continue to purchasing Cougars and Buffalos from Force Protection for many years but probably in much smaller numbers after 2008. But the service revenue is high margin revenue and therefore, Force Protection could end up with profits in 2009 only slightly less than in 2008.
Force Protection uses subcontractors to help them manufacture their vehicles. Perhaps as much as 50% of the labor for manufacturing Cougars is done by other companies in other locations. If the MRAP program were drastically ramped down, then Force Protection will not need other contractors and can build the entire vehicle in-house increasing their margins. Without a Cheetah contract, Force Protection is a much different company but still profitable with more revenue than they had in 2006. If Force Protection does get large Cheetah orders, then that would potentially add $400 million in 2008, and in 2009, the revenue would largely make up for the decline in Cougar orders.
One of the hallmarks of Force Protection is that they take few chances. Force Protection has ramped up production of vehicles in the past only when they know that they have sufficient contracts or will get sufficient contracts to use the new production equipment. Therefore, it was a surprise that Force Protection began building a new factory for the Cheetah even before they had orders.
But perhaps Force Protection is not taking much of a chance. Members of the military have indicated several times that current MRAP vehicles are too large for many of the operations that the military must undertake. Both the Marines and Army have indicated that they would like a smaller MRAP vehicle for some operations and a vehicle like Force Protection’s Cheetah is what many have said that they need. Which makes one wonder whether or not Force Protection has not already been told that they will get orders for the Cheetah after it finishes military testing? Otherwise, Force Protection is taking a huge risk that is uncharacteristic of them.
In the “war” between TheStreet.com and Force Protection, the war is fought on two different battlefields. TheStreet.com publishes their anti-Force Protection articles for their own reasons – which might have something to do with the large short interest in Force Protection stock. Force Protection is on the SHO list indicating that is has been illegally shorted or more shares were shorted than there were shares available to be borrowed. Many believe that TheStreet.com publishes articles with a “slant” that is designed to help hedge funds friendly to TheStreet.com or to Mr. Cramer. The inaccurate and extreme negative nature of the coverage reinforces this belief. Force Protection fights their battle on the factory floor where they are manufacturing as many vehicles as they can and are ramping up quickly. They wage it by designing a vehicle that can survive explosions from IED and mines that weighed hundreds of pounds.
It is without doubt that all the negative coverage by TheStreet.com of Force Protection has contributed to pushing down the price of Force Protection stock. The question is whether the positive news from the factory floor (Force Protection is producing MRAP vehicles ahead of schedule and they are expecting large new orders for more vehicles in the next few days) will reverse the trend and once more make Force Protection shares a favorite of shareholders.
FROM RB |
