Force Protection: One-Trick Pony?

Fire up your favorite stock-screening tool and you'll fund a bunch of stocks for $3 or less that traded for two, three or eight times as much within the past year. A lot of $1 and $2 and $3 stocks are garbage.

Unless a company is broke or engaged in malfeasance, it might be reasonable to figure that a stock that used to be $5 could trade at $5 again. The role model is Corning, a throwaway at $1.50 per share in 2002 but $10 by late 2003 and $25 today. I didn't have the guts to buy it, though I thought about it.

Could Force Protection be tomorrow's Corning? Its stock (symbol FRPT) has plunged. The shares, which traded for as much as $31 last May and at $15.42 as recently as November 29, closed on April 16 at $3.16. They're up from $1.03 on March 17.

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Force Protection is a one-product company with the ideal primary customer. The customer is the U.S. military, which has a gigantic budget and is under withering pressure to protect the lives of soldiers and Marines.

The product, which Force Protection has made since 2003, is Mine Resistant Ambush Protected, or MRAP, vehicles. MRAPs (photos at www.forceprotection.net) resemble Humvees but are hardened to shield occupants from improvised explosive devices and car bomb blasts, the most lethal weapons Americans face in Iraq.

In October 2007, the Marines ordered 800 more MRAPs from Force Protection for $375 million. That's enough to keep Force Protection's main production line, located just north of Charleston, S.C., busy for the rest of 2008.

FP recently signed a partnership agreement with General Dynamics -- the deal is called Force Dynamics -- to have GD manufacture some of the vehicles. FP also bought an empty factory in North Carolina to produce a lighter, off-road-capable MRAP called the Cheetah. The current model, the Cougar, can't go into the bush.

The problem is what happens after 2008. Force Protection's future hinges on what happens in Iraq, what the Pentagon does, whether it can find takers for the Cheetah, and, at least to some degree, who will be the next president.

But what has wreaked havoc with Force Protection's shares stems from company-specific problems. This company, to be blunt about it, comes with a lot of baggage.

For starters, FP's previous management wasn't ready for prime time. As the military's needs grew and the Pentagon exercised closer oversight, Force Protection fell far behind on production deadlines, according to a military inspector general's report. The company had serious problems with missed deadlines in 2006 and 2007. These events led the company to set up the joint venture with General Dynamics to speed and improve the manufacturing of MRAP vehicles.

FP's past accounting practices were also troubled. At best, they couldn't keep up with the company's rapid growth. At worst, the current drive to restate all manner of financial statements, both income and balance sheets, betrays a pattern of trying to push the stock up by making the business look better than it was.

Only this month has FP managed to hire a nationally known audit firm. The stock market is awaiting final, restated 2007 results and Nasdaq is threatening to delist the shares because of the delays in reworking past financial statements.

A slew of law firms filed suits in early 2008 against the company, its current CEO, Michael Moody, and several former executives, alleging that the old management illegally manipulated the stock price. It's true that a few insiders, including the former chairman and the previous CEO, sold tens of millions of dollars worth of shares in 2006 and 2007, when the stock was soaring, and subsequently quit.

The new leadership -- CPAs from outside with a history of running turnaround operations -- have distanced themselves from the old guard, but they won't say anything about the lawsuits or the allegations. The lawsuits and the text of an inspector general's report are pretty harsh. You get the sense the stock should never have gotten to $30 in the first place, but the news in 2006 seemed to have justified the price.

The new financial statements will shed some light on what's gone by, but what now? On a recent conference call, several analysts pressed Moody and the interim chief financial officer for details about the upcoming restated earnings, to no avail.

About the only news that came out was that FP looks like it will be able to sell a few vehicles to the British and Italian militaries. That won't bring in much revenue, but suggests that the marketing people are trying to look beyond the Pentagon.

CEO Moody said in March that FP "has no firm orders yet for 2009." One of the analysts who was on the conference call said in a subsequent interview with Kiplinger's that that was still the case and that FP is in trouble because "this is a one-product company that needs more traction."

The best news for shareholders would be if FP found a buyer for the Cheetah. The company has invested millions in the Cheetah's development but has nothing to show for it. That almost sounds like what you hear from a biotech startup that has a great idea but can't get past the second round of clinical trials. Those kinds of stocks also go from $30 to $1.

There's no point in talking about FP's earnings per share and growth rates and other financial indicators because what's past is of uncertain validity and what lies ahead is unknown. For what it's worth, the average earnings estimate for 2008 is 73 cents a share, giving the stock a price-earnings ratio of 4. Neither number is worth much.

But you can still wonder whether the stock can go from $3 to $6 like it did from $1 to $3.

Our analyst source, who agreed to speak on background, says "$1 was awfully cheap." He pegs the liquidation value of the company at between $2.50 and $3 a share. That would largely depend on what FP could get for its land and factory equipment.

But if FP "could get a couple of orders this year," our analyst friend says, the stock could trade up at $5. "It'll never be a high flyer again, though," he adds.