What's Behind Force Protection's Significant Share Price Drop?
In the past, I have written several articles regarding Force Protection (FRPT) and what I believed were the major drivers either pushing the stock into positive or negative territory. There is little doubt that I never expected the share price to endure the incredible losses that it has, reaching a low of $1/share on Monday, March 17, 2008, compared to $15/share as of the writing of my previous article, and noting that this stock once topped $31/share less than a year ago.
Although a research chemical engineer by training, I am not specifically versed in quantitative stock analysis (e.g., chart analysis), nor do I work in the financial sector. Rather, through due diligence, quantitative analysis (e.g., simple accounting principles), and devouring as much news as possible, I have tried to make some arguments for why I believed Force Protection would ultimately be amongst the premier MRAP suppliers for US military operations. I assumed this lofty goal would occur over a range of vehicle categories, from the larger troop transporter, such as the Buffalo, to ultimately being the front-runner in the Humvee replacement program through the Cheetah.
Simply put – I was absolutely wrong. Although I try not to post on the various message boards any longer (e.g., Yahoo Finance and Google Finance), there has been an incredible polarization of shorts and longs on this stock, particularly with the recent announcements of several class-action law suits claiming that Force Protection management has been negligent to shareholders, and provided false investment information that ultimately mislead investors.
I believe the rise and fall of Force Protection is directly related to primary factors, which, unfortunately, I underestimated. The first is directly related to a thesis previously presented in my earlier articles. Force Protection’s business performance is exclusively based upon the number of vehicles it can manufactures, and subsequently sells. It does no good to receive a massive order for vehicles if manufacturing capacity is ill-equipped to deliver, and similarly, it does no good to have extensive manufacturing capacity without a healthy order list (although one could argue that receiving massive orders is preferred since manufacturing capacity can be out-sourced, at a cost of course).
Force Protection operates under this premise in a riskier environment than most traditional vehicle supply providers because it has one customer providing all of the demand – the Department of Defense (DoD). There were ample reasons to believe that Force Protection was a preferred supplier for DoD, some of which included:
- Strong intellectual property portfolio of the V-hull technology;
- The only MRAP provider to have two class of vehicles, the Buffalo and Cougar, operating in the field for significant amounts of time, with significant exposure to IEDs, and proving incredibly effective against insurgent counter-measures;
- Rapidly expanding and state-of-the-art manufacturing capacity at all three scales: Buffalo, Cougar, and the smaller, lighter, Cheetah, which was requested by DoD; and,
- A strong history of increasing supplies, meeting incredibly aggressive timelines for vehicle delivery, and where required modifying engineering designs to meet evolving demands.
In short, there was no reason to believe that Force Protection could not sell every single vehicle that it could produce, especially in a climate where the DoD suggested it would purchase every MRAP that could be purchased.
The primary reason for Force Protection’s decline to current price levels is that the customer failed to show up to the store and buy the product. It’s as simple as that. The DoD has instead chosen competitors that unfortunately do not have the performance history that FRPT vehicles have, which while does not necessarily mean they are inferior, certainly does mean significantly increasing risk for our troops. One could perhaps justify such risk if either the competitor’s vehicles represented superior technology or more cost-value, but from the public information available, neither of these facts appears to be true.
The second factor is not customer related, but rather can only be directly attributed to Force Protection senior management. I find it hard to believe that any reasonable investor, particularly those with experience in the manufacturing sector, would have significantly deviated from Force Protection’s investment in manufacturing capacity. Capacity was always cited is the number one reason for why DoD would perhaps consider other providers, therefore, I think management was wise to ramp up on manufacturing capacity as quickly as it did.
What is simply irreprehensible, and I believe angers investors to their core, is the lack of accounting discipline and structure by Force Protection senior management. While I don’t believe the accounting deviations reported were done intentionally with deception as an end-goal, there is no excuse for not having clear accounting. This is particularly true because Force Protection is a materials supply and demand business with no sophisticated accounting typically required of large international corporations that provide service, product, and/or capital. This, coupled with DoD’s irrational treatment of Force Protection, I believe, has been the primary drivers to the current share price of $1/share.
What do we do now? This is a question that is being asked by many, including myself. Having sold and bought shares at various price points, both making and losing money on various trades, I am holding my current position. I believe that the recent sell-off to $1/share is clearly over-done; however, to reach anything +$5/share, the above two factors have to absolutely be resolved.
First, and foremost at this point, Force Protection management must ensure investor confidence, both in accounting and that creating shareholder value is a priority. I, along with other investors, have been stunned at the lack of a corporate response as the price has fallen by as much as 25-35% in a single day, for repeated days. This is unacceptable.
Second, Force Protection must establish an expanded customer base. It’s clear that the DoD is not reliable, therefore, all efforts should be focused on identifying other customers, whether they include targeted defense sales to other nations, or targeted sales to specific multi-national organizations (UN Peace-keeping, NATO, etc.). Although it could be argued that the Cheetah still has a possibility of becoming a Humvee replacement, the recent DoD behavior would suggest otherwise, therefore management should eliminate this from discussion as a future source of business (e.g., if it happens, wonderful).
Lastly, I would like to say that there is significant debate as to whether this stock has been heavily manipulated, primarily by short sellers using naked shares. Certainly, this may have contributed, but I hesitate to cite “market manipulation” as a primary driver, since it’s something that cannot be proven or addressed by management moving forward. Therefore, let’s focus on what Force Protection can fix.
If Force Protection can address the above two issues, immediately, while at the same time demonstrating that shareholder value is important to them through issuing more responsible and frequent press releases, then perhaps discussion on being an acquisition target can proceed. This would be step three, in hopes that one of the other major defense contractors would be interested, if not as an acquisition target, then at least as serving as a manufacturing contractor.
I clearly don’t have a good track record with predicting the share price direction of Force Protection, but I hope that changes from this point forward, along with the share price direction, assuming Force Protection is reading.
Best of luck to all investors, shorts and longs, and I look forward to hearing your comments, questions, and suggestions.
Disclosure: Author has a long position in FRPT
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This article has 18 comments:
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buyitcheap
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435 Comments
Mar 18 08:38 AM-
Zhenya.Kolya
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1 Comment
Mar 18 08:59 AM-
FRPTsaveslives
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1 Comment
Mar 18 09:37 AMYES...FRPT management is doing a poor job supporting shareholders. They should be issuing press releases more often to set aside shareholder fears that occur with these HUGE drops in stock price. Also they should be directing their efforts to foreign buyers since Uncle Sam has given them the cold shoulder.
I think past management must have rubbed the DOD the wrong way & thus they have been shut out of contracts. It's that or our Congressmen are giving out PORK to their favored companies....that's impossible because all our Senetors are honest right? It is sad that our troops get second rate equipment from other manufacturers. As shown by vehicle deaths in Iraq.
I believe another defense company will buy FRPT for there technology & build capacity. At what price....good question. Hopefully more than Bear Sterns.
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buggman
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1 Comment
Mar 18 10:46 AM-
Engrkenn
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1 Comment
Mar 18 12:33 PMNice article but, I hate to break the news to you and your readers, you missed the most important reason FRPT took a dive. Their product design for the armored cocoon is terrible relative to BAE's and their production processes are archaic by automotive industry standards. As a result, they were utterly and completely unable to meet production schedules. BAE and Navistar could. Our troops need more reliable providers and that is why they didn't get any orders. FRPT couldn't deliver! I am long on FRPT as well and have taken a beating! Difference is, I did my homework and found out why!
Engrkenn
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SadAboutFRPTManagers
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2 Comments
Mar 18 12:41 PMWhat is all the more frustrating is that since the former CEO's December letter to shareholders, Force Protection hasn't uttered another word to its shareholders. Instead, all shareholders glean is an occassional quote from Aldrich in a Bloomberg or Street.com article, which presents Force Protection in a very dim light - putting it mildly.
If for no other reason, Force Protection as miserably failed its shareholders, not simply because the share price has suffered dramatically, but because it has completely failed to properly manage its financial house and because it has - despite recently hiring an IR consultant - completely failed to communicate with shareholders to provide some meaningful explanations regarding the current status of DoD orders, explanations for not diminishing DoD orders, and the staus of Roxboro, Cheetah, JLTV prototype submission, sales/marketing efforts abroad, etc.
Indeed, while Aldrich is out publically issuing statements to Bloomberg reporters, the Company has not bothered to issue a simple statement merely indicating it will vigorously defend the pending (class action) shareholder lawsuits. Gee, how wonderful it has been that FRPT hired that IR consulting firm.
Still, the company has much potential upside value and far-reaching global opportunities, but at the moment management seems intent on leaving its head stuck in the sand leaving the distinct impression that the company is floundering and gasping its last breath.
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jcisl
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1 Comment
Mar 18 01:50 PM-
Manny Otero
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8 Comments
Mar 18 03:03 PMThanks tremendously for all the feedback, and I appreciate your analysis and commentary. I would just like to respond to Engrkenn who suggested that in fact the BAE product design is far superior to Force Protection's technology and design. Could you please provide the following data:
1. How many BAE vehicles have seen real combat, in excess of 1 year, and have been repeatedly challenged, either with conventional bombs or non-conventional IEDs?
2. What is the personnel survival right of the above data, assuming it is statistically significant?
3. Similarly, what is the vehicle survival rate?
4. What are the specific product design features that you feel make BAE a superior product? What is the cost of a BAE MRAP vs a Force Protection MRAP?
I'm sorry sir, but to say that the technology is superior, without relevant data to back it up, is in correct. Now, it's absolutely true that BAE has a large manufacturing capacity than Force Protection - no doubt. However, Force Protection had numerous mechanisms in place, including internal expansion and a partnership with General Dynamics, that would have facilitated expansion. Furthermore, Force Protection has always said it was open to further collaborations should the demand require it. As I have stated, the issue here is that DoD failed to provide the motivations - orders.
Thank you for your comments,
Manny
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SadAboutFRPTManagers
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2 Comments
Mar 18 04:15 PMI completely agree. There has been no MRAP battle units more tried and true than those manufactured by Force Protection. Those are just the facts. Notably, I'm not aware that BAE or Navistar have received the first foreign orders, which - in my opinion, potentially bodes well for FRPT, especially since the UK will be ordering MRAPs through 2010.
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User 165441
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1 Comment
Mar 18 06:40 PMManny, very good article and I agree with most of your positions! Though, there are a few more things to consider to the equation why we (FRPT) did not get the majority of orders! Don't worry, we'll get them!!!
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voyager
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3 Comments
My Website
Mar 19 12:09 PM-
Manny Otero
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8 Comments
Mar 19 12:33 PMAgain, thanks for the ongoing comments and discussions. I'm very happy that my opinion piece has generated this response. Voyager, let me just reply that I don't think you should join the class action against FRPT. Of course, I am biased and long on FRPT, so I am not objective. But, if I can offer you my honest assessment I do not think these class action suits will materialize into anything significant. First, FRPT has insurance against such claims, and it's not clearly obvious that there has been any intentional deceit on the part of FRPT management. It's true that there accounting has been at issue, but I expect them to restate very shortly. Furthermore, they have just announced a conference call for next week to address the various issues surrounding the company. At least they're finally issuing some type of press to address shareholder concerns.
Based on what they say next week, you can then decide whether to join. That's my opinion.
Lastly, thank you for your service to your nation. My wife is currently serving in Iraq/Afghanistan as a Weapons Systems Officer aboard the B1-bomber, in the USAF. I understand the sacrifice of family to military service, first-hand.
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voyager
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3 Comments
My Website
Mar 19 04:27 PM-
Montrealmelon
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1 Comment
Mar 20 12:44 AMAs for the Cheetah, forget about it. Do you really think the DOD, who basically shelled out approximately 200 Million so competitors could copy the only proven MRAP made in the USA , will give the Cheetah a go. Think again.
Force protection has but one option left with the Cheetah, and that is, to offer any European country a manufacturing faciltiy employing 300 to 500 people if they buy 3000 Cheetahs.
Face it, this game played by DOD's of the world is corrupt. If FPI can't make an argument that their vehicles are more economical, can be built at a rate of at least 200 units per month, employ 1000 people, do you really think they stand a chance.
I've posted this since the first DOD competition. Anything short of a Sole Source was bad news for FPI. A monopoly is what we invested in, rightly so, the DOD changed that on the bogus manufactring claim. Much easier sole sourcing, and have manufacturers build the one platform , isn't that their thinking with JLTV, as a matter of fact , just recently AM General uttered those same words.
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But I'm Not Dead Yet
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1 Comment
Mar 24 09:08 PMForce Protection has/(had) capacity to manufacture vehicles for the DOD. That was not the problem. Force Protection also had a pretty good vehicle design in the MRAP I (Cougar) with lots of troop support and many thousands of safe vehicle operating hours under their belts. So, what went wrong?
On MMPV and MRAP II, the companies were all asked to modify their designs to meet higher performance requirements as laid out in the Performance Specification section of the Request for Proposal (RFP). So, ALL companies were asked to go back to the drawing board and make these modifications. Unfortunately, FRPT management was too pig-headed to make the necessary changes, and as a result their proposals for both MMPV and MRAP II did not go very far.
This was THE fundamental problem, in my opinion, that caused the share price to be where it is today. FRPT management had won most of their prior business under "single source" sourcing decisions as Montreal Melon correctly pointed out above. FRPT management FAILED (an ABSOLUTE failure, in my opinion) to adjust their business model to take into account the competitive nature of *MOST* pentagon procurement programs. They were banking on their track record of reliable, dependable and safe vehicles, along with a growing stable of production capacity, and the political connections they had developed at the Marine Corps to carry the day for them (YES, you read that right -- FRPT actually had a definite political *EDGE* over their competitors due to their growing Buffalo and Cougar business).
Unfortunately, this was not enough to carry the day. They basically "mailed in" their proposals for MMPV and MRAP II, with essentially unmodified vehicles, and it was game over. Despite the political pressure to give business to FRPT, the pentagon procurement process is what it is, and there was no way the decision makers in the could give any additional business to FRPT without having the other companies file a challenge, and the challenge process would only slow things down which the Pentagon could ill afford to do. How utterly, inexplicably, unforgivably sad this all turned out for FRPT, when it should never have been so.
BINDY
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voyager
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3 Comments
My Website
Mar 25 10:56 AM-
zlandshark
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1 Comment
Apr 02 06:02 PMI realized from research and yes, "From Cramer" that there were other companies entering or already in the market.
I sold FRPT high and bought into Spartan, a supplier as well as a builder. It isn't wise to have all your eggs in one basket as FRPT.
As I watched the military vehicle orders change, as did our build up of military, it became more evident that the vehicles already there were doing their job and that IEDs were used on foot soldiers.
So I ended my ride with Spartan, which was on a down swing, but none like FRPT. I was sorry to hear of the fudging that higher management became involved in which only means lawsuits and a hurting for the company.
New technologies bring with them the problem that a newer technology or company involved in the same business can also make what you do after the intial surge.
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raman kandola
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57 Comments
My Website
Apr 14 04:14 AMFRPT is a world class MRAP, and late comers are trying to catch up with them. They can even replace the H1 hummers, and start exporting in large phase with all our Allies.
FRPT saves life, no doubt ! But are they saving shareholders investment. We need to get some kind of a confidence from the management, or jut have them selves sold to a big company like General Dynamics, or Lockheed Martin.