Saturday, October 14, 2006

Force Protection Update -- Would Bernard Baruch Be a Buyer?

Famous Wall Street financier, Bernard Baruch (1870 – 1965), was reputed to have said: "Don't try to buy at the bottom and sell at the top. It can't be done except by liars."

Back in August, when the stock price of blast-protected military vehicle maker Force Protection (FRPT-$8.04) was already up about 306 percent, we expressed our concerns that—although the Company had an attractive product(s) and backlog—that (1) with relatively short production runs and high fixed factory costs, sustainability of future profitability would be difficult to predict; and (2) the price run-up in the stock already reflected the profits being reaped by the Company because of the U.S. military’s need to ramp-up of combat-ready protective vehicles for service in Iraq and Afghanistan.

Contrary to what the ardent bulls believe, the stock price of Force Protection continues to defy gravity. On September 23, 2006, the Common Stock price hit an intra-day (52-week) high of $9.43—probably fueled by investor euphoria after leaving—the revival tent—oops!—the annual shareholder meeting.

First described by Sir Isaac Newton in his universal law of gravitation, what goes up—must come down.

“Millions saw the apple fall, but Newton was the one who asked why” – Bernard Baruch.

As the following table highlights, selling of shares by insiders - which includes executives, directors and top shareholders at the Company - has been rampant in recent months. In our view, the Common Stock of Force Protection is Newton’s apple, almost ready to fall from the tree:

Gordon R.
CEO10-09-06Disposed of100,0008.38
10-10-06Disposed of77,4008.17
10-11-06Disposed of122,6008.11
Director10-03-06Disposed of178,6008.55
10-04-06Disposed of114,1238.48
10-05-06Disposed of287,2778.11
Gordon R.
CEO9-26-06Disposed of83,3338.77
Ervin R.
Director9-25-06Disposed of190,7368.90 – 9.10
9-21-06Disposed of134,0008.99 – 9.18
9-22-06Disposed of129,5008.90 – 9.05
Director9-15-06Disposed of599,6407.48
9-18-06Disposed of84,8657.98

9-08-06Disposed of309,0007.02
9-11-06Disposed of119,7507.01
9-12-06Disposed of119,7507.36
Ashford Capital, LLC
Frank Kavanaugh,

Disposed of1.0 MOngoing
On August 10, 2006, a prospectus related to the sale of up to 8,250,000 shares of Common Stock was filed by existing stockholders with the SEC. Force Protection will not receive proceeds from the sale of shares of Common Stock in this offering.

Is the stock price of Force Protection starting to tire?

On October 6, 2006, Congress approved a $448 billion defense-spending bill (including $70 billion in emergency spending for the Iraq and Afghanistan wars). The news boosted the prices of most defense contractors, with the Spade Defense Index (^DXS), which tracks the industry and trades on the American Stock Exchange, rising 4.3 percent in the last two weeks. The price of Force Protection dropped 0.7 percent in the same period.

In the appropriations bill are line items provisions that could prove attractive to the top-line of Force Protection, including contract opportunities for a chunk of the (1) almost $300 million allocated for Mine Resistant Utility Vehicles (MURVs); and (2) $1.7 billion targeted for the indigenous Iraqi Defenses Force as it continues to build-out its own security capabilities (which we assume would include armored vehicles).

If insiders thought that the Company was going to benefit from the latest appropriations bill, would it not be in their best interest to hold on to their shares?

“There is something about inside information which seems to paralyze a man's reasoning powers.” – Bernard Baruch

At the recent shareholder meeting, CEO Gordon McGilton remarked: “The future of the company looks better than it ever has, to those that are working in, and on, it daily. Vehicle deliveries to the customer are increasing steadily. We have now secured contracts with an international customer, and we have future products well into the development process that will create an even broader product offering as we go forward.”

“Never pay the slightest attention to what a company president ever says about his stock.” – Bernard Baruch

Apparently, the company's insiders seemed to have ignored McGilton's remarks (including himself). Granted, insiders sell for many reasons, but when Force Protection insiders register to dump (sell) on the market —or have already sold hand over fist—a combined 23.5 percent of the Common Stock float in the last ten weeks, this raises an ominous red flag.

There has been no reported insider buying during this time period, too.

“Do not blame anybody for your mistakes and failures.” – Bernard Baruch

There will be investors who will fail to heed this warning—instead, accusing the 10Q Detective of being a shill for short-sellers. As editor, I will repeat one more time: The 10Q Detective has NO financial interest in Force Protection and has a FULL DISCLOSURE policy.

In our view, fiscal 2007 may represent the cyclical peak in a multi-year rise in military spending. We caution that unseen rust may be corroding the underbelly of Force Protection’s armored growth engine. The catalysts for a precipitous collapse in the price of the Common Stock price include (a) the missing of unit volume targets because of delays in certain military contracts; (b) a November mid-term elections (majority) win by the Democrats in either the House or the Senate (which could lead to a future draw-down of U.S. troops in Iraq); and (c) less-than-anticipated contract wins.

“I made my money by selling too soon.” – Bernard Baruch

Editor David J Phillips does not have any financial interest in the stock of Force Protection (long or short). You can see his portfolio holdings in the sidebar. The 10Q Detective has a full disclosure policy.


Patrick said...

David, I'm really enjoying your postings on FRPT. I reread the August posting and looked back at the 10-Q. Can FRPT continue the rise in revenues? Deferred revenues came down $12 million during the first half of the year, which means the revenue line this year may simply be benefiting from timing. Another area of concern with the max-out of the factoring contract. How is FRPT going to generate cash going forward? The company has fully tapped the equity market with the recent PIPE deal and since they don't have a disclosed plan to factor more receivables...speaking of A/R, I noted that it jumped 100% in the first half of the year. Cash flow from operations this year has certainly been propped up by the decrease in inventory and increase in A/P. All in all, I think your bearish call on FRPT will be borne out by the end of the year...maybe as soon as Q3 results are released.

Repoman75 said...


I completely disagree with your assessment on FRPT for fundamental reasons, but let's forget those for 1 second. And let's focus on how you FAIL to make money for you readers. When your 1st "blog" on FRPT was relesased, I believe FRPT was trading in the high 5's or low $6's, and that was a mere 3 months ago. You were bearish then. SINCE THEN, THE STOCK HAS MADE A 33% RETURN AT LEAST. Well done. If I was one of your continuous subscribers, I would THANK YOU for preventing me from making such a spectacular return (see sarcasm). Maybe I will beging to subscribe to your blogs... and then I can do the OPPOSITE of what you suggest and make a fortune.

jaypbee said...

David, your recent comments about insider selling make no mention of the fact that the Form 4 filings stated these were "planned sales." My understanding is that the stock was held in blind trusts and a sell price was given at the time the trust was created. At that time, FRPT pps was probably below $1, so a sell price of $8 or $9 was a far away dream.

It is not likely that insiders, including the CEO, would sell on information the rest of us don't have, is it?

Another fact you fail to mention is a new 100,000 ft. sq. production facility being built. This would not be necessary if demand for FRPT product was slowing.

You make no mention of the ILAV contract that has yet to show up on the company's books as revenue, nor do you mention that FRPT has so far met its contractual obligations to deliver the vehicles ordered by the Marines.

Moreover, you fail to mention the likelihood that FRPT will be listed on NASDQ in the near future, increasing its coverage and exposure many times.

The story of the bulletin board stock that could is not unattractive in light of the performance of FRPT's vehicles, that have to date , 100% track record of death prevention for any troops using them in the field.

Many more potential investors will have a first look at this company, and some will think it is a good buy at $8.

"Fair and balanced" reporting, please.

Anonymous said...

I agree with what you say. Watch what insiders do, not what they say.If this stock is poised to go much higher insiders would not be dumping all their shares.You put out a great report. Keep up the good work.

Anonymous said...

You tried once to kill the share price of FRPT when it was at $6.00. It ran to $9.00 and now you have cowardly and again without the true facts are trying to hurt the share price again. I think people will once again see thru your evil scheem of what you call an objective analysis that you are truly a pathetic short of one of the best success stories this year.

Ryan said...

Weren't almost all of these 10b5-1 "planned sales" by the insiders in question? Basically, they had no control over the timing or price of the sales.

I would expct a "detective" to know that (or at least mention it in his article).


C. Jerome said...

Why did you fail to mention that all the insider stock sales were made in accordance with 10b5-1 blind stock sales plans? If you know anything about such plans you know that the insiders whose shares were sold had no control over the timing of the sales. As a shareholder I was concerned about the apparent "lack of confidence" in the future of the company that may be signalled by such insider sales. I noted that some of the SEC filings clearly identified the sales as being automatic sales pursuant to 10b5-1 plans while others did not, so I e-mailed one of the insiders whose filing did not include the footnote. He informed me that his sales were indeed part of a 10b5-1 plan even though they were not designated as such in the filing. Upon further investigation I discovered that the SEC does not require such footnote clarification; however, I think it would be prudent of the seller to provide the information in order to prevent "reporters" such as yourself from making uninformed commentary.

Anonymous said...

This is a joke, last time you posted you blog the stock went up by 50%. Now the insider sales were all reported in 10b plan please read the form 4 relating these sales.

Anonymous said...

It's sad that you need to create alarmist reports and fail to disclose the nature of the insider sales which were based on form 10b5-1 (see a note publised by CE Unterberg, dated 9/29). Clearly the price run to $9.50 was aggressive and the stock needs to consolidate, but to paint half the picture, as you've done in both your reports is unprofessional, at best.

Patrick said...

I still haven't seen in the comments any rebuttal regarding FRPT fundamentals. How is the company going to generate cash going forward? What about the timing benefit of deferred revenue releases?

Anonymous said...

David, Blah, blah, blah. blah blah and blah. Also, blah blah blah. Keep up the DD. And by the way, blah!

Anonymous said...

Sad the Street.Com even picks up this blog as a worthy and objective message. Why would anyone spend as much time as you do on a company you claim no vested interest in? I guess you are out there to protect the little guy huh?

Anonymous said...

Your timing is very unusual considering it follows a Forbes piece speculating AH may swallow FRPT.

Do you have friends that get nervous?

Companies, People, Ideas

Armor's Next Target?

Matthew Swibel 10.30.06

Not a single serviceman has been killed riding in the 23-ton Buffalo vehicle or the 17-ton Cougar urban fighting vehicle used in thousands of missions on the bloodiest routes in Iraq and Afghanistan. That's a record Humvees fortified by Armor Holdings can't match. In January 2006 the Army ordered 41 Buffalos from Force Protection Industries, the $50 million (sales) company, which also builds the Cougar and two other models. The Buffalos, which earn rave reviews for protecting convoys from mines and improvised explosive devices, incorporate components from Caterpillar (nyse: CAT - news - people ), General Motors (nyse: GM - news - people ), Volvo Group and Mack Trucks. The Army's fiscal 2007 budget includes $180 million for another 250 to 300 Buffalos over three years. The company recently won a $65 million contract from the British government for 85 Cougar-based vehicles.

Unlike armored Humvees, Force Protection vehicles feature a V-shape hull that sits on the axle. "This leaves the vehicle less vulnerable to blast energy," says Michael Aldrich, vice president of marketing at Force Protection, which forecasts 2006 sales of $200 million. With production at capacity at its main campus in South Carolina, Force Protection is in discussions to set up another assembly line at Armor Holdings' Stewart & Stevenson plant. "Armor Holdings has expertise in this field that makes a partnership look good to both of us," Aldrich says.

Might a partnership lead to an acquisition? "We think they have great products," allows Armor Holdings' Schiller.

bud said...

Your report on FRPT presented a Cramer type approach and on looking at your items one would sell so why is it that I'm buying and bought more today? You do not understand what this company is about and why it has gone up and will continue to go up. They are committed to bringing the best products to the market that will save lives and they have proven that point every day and more and more people can see that, both Democrats and Republicans, this board is very very supportive of the products and the future of the company. I remember when IBM owned 25% of microsoft and early on they sold all of it saying they could do better.

Anonymous said...

Unfortunately for those of you posting otherwise, not all of the trades made by insiders have been 10b5s. In fact, it seems that only the Kavanaugh trades are so marked. (Look at the form 4s.)

And you all make it sound innocuous that management is selling, when that is certainly not the case; they are selling stock to the public, and they know what's up. If the stock was clearly headed higher, or they were selling the company, they would cancel the plans!!)

elmotower said...

I have emailed on occasion and am quite surprised on your recent blog on FRPT. I think you are 100% wrong. Couple points: FRPT is partnered with BAE on the ILAV contract that has a line item for 600 additional units. FRPT in the Forbes article coming out on 30 October has them in talks with Armor Holdings for additional production on either Buffalos or Cheetahs. There is a line item in the approved 2007 Budget for 228mm for JERRV's, and 298mm for Mine Resistant Utility vehicles. The insider selling was planned 10b5-1 sales and I did talk to Frank Kavanaugh(Chairman of the Board) and he told me they were set up last year. FRPT is just about to be listed on the Nasdaq or NYSE and if I am correct, you will be posting in a month or two on how FRPT doubled when you were bearish. Jeff

Anonymous said...

Are you a member of Al Quaida? Only Al Quaida wants Force Protection to fail!

Anonymous said...

You brought this incredible to my attention and I bought many shares and the value of those shares has increased significally. The first insider sells did not bother me, but after a few more I started to get a little worried. So I said why not try to contact these insiders and express my concern. I emailed them thinking I would not get a response. Surprisingly I did almost immediately. They apologized about the timing and regretted they could not change the plan, doing so would violate the rules of the plan and would be considered insider trading. All the sells were planned even though a couple of the Form 4's did not state it. Also these plan were put in place when the stock was trading under $2. If you would have contacted these people and inquired like I did there would be no need for this article. It doesnt hurt to ask. Anyway I still owe you a big thank you for bring this stock to my attention. Good luck.

Anonymous said...

I have been long frpt for over a year. The last time I fell in love with a stock that had major insider selling was DHB. I believe in frpt products and think they have a lot of potential, so I'm holding on. Already broke by stop loss of $8, but I just cannot pull the trigger to sell.

Anonymous said...

I suspect that nothing would please you more than the news of a soldiers death in a Force Protection vehicle.

You would probably use your rust analogy to great effect.

I'm fairly confident that you do not have a son or daughter on patrol in Iraq.

Anonymous said...

I think if you just did some good DD and really looked at the 10Q's and then answered your first commentor...Patricks questions then you may salvage yourself a bit.

First answer him about cash which can all be found in 10Q and other filings.

Deferred revenue is another area that the 10Q would answer once investigated.

Yes cashflow has been manipulated by using someone elses money...AP and clearing inventory...both very good and sound financial strategies when cash it tight.

I could go on but I ain't even a Financial mucky muck and can sort this stuff out. The has just lost my interest for life promoting your likes.

Good luck to you

Anonymous said...

Well my opinion of bearish is that at upper-management they are right in terms of stategic position and fundamentals. But it appears the bears neglect strategy.

If these statements of additional contracts, production, and even multi-year contract possabilities are true ot become true. Then their long term strategic position will change and will warrant another evaluation of its fundamentals.

About the bulls and the bears of this one. The bears keep following, and the bulls feed the bears at their own risk. The bulls may have some running room yet.

Anonymous said...

Boy David, you sure do spend a lot of time analyzing Force Protection without having a stated position. It is only human nature to have an ulterior motive. What your motive is against a company that is only saving the lives of troops who protect you so you can spend your days criticizing them is unknown. Good luck though, I just canceled my subscription to the Street.Com based on them giving you whatever exposure you get from them.

David J. Phillips said...
This comment has been removed by a blog administrator.
David J. Phillips said...

Ain't that cute--are you too afraid too leave a name? Yet easy to accuse me of having an ulterior motive.

You are correct--I do have a motive(s)--to make corporate governance more transparent; to hold managements more accountable for their fiduciary responsibility to shareholders; and to ensure that they EARN their outrageous pay packages.

Do I profit from each posting? No. But cannot someone embrace a passion w/o being accused of having a Darth Vader complex?

It is sad that you cancel your subscription to in "protest." Would you rather read nothing more than glowing reports about each and every stock that you own. Who would be the one with the ulterior motive then?

Anonymous said...

David, I don't think anyone has a problem with you reporting facts. Problem is, you have presented some misinformation in this article and the in the last which you have not attempted to rectify. The first sentence in this article is wrong. On August 28 the hod was $6.50. We didn't cross $8 until Sept. 18. Also, you might take another look at those 8.25 million shares. I think that was a private placement generating $41,250,000. The company is debt free. With this and what others have posted you now have the information needed to correct your articles. Ryan.

NOMAD said...

Over the years I have learned to see beyond the bullshit on Wall Street."HAVE FUN DAVID" time is almost up "BIGGER FISH EATS LITTLE FISH" .. NOMAD

Anonymous said...

I reiterate. FRPT just marched to 13.49.

Well my opinion of bearish is that at upper-management they are right in terms of stategic position and fundamentals. But it appears the bears neglect strategy.

If these statements of additional contracts, production, and even multi-year contract possabilities are true ot become true. Then their long term strategic position will change and will warrant another evaluation of its fundamentals.

About the bulls and the bears of this one. The bears keep following, and the bulls feed the bears at their own risk. The bulls may have some running room yet.