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:

Beneficial Owner	Relation	Transaction Date	Ownership Action	Shares	Price ($)
Gordon R. McGilton	CEO	10-09-06	Disposed of	100,000	8.38
		10-10-06	Disposed of	77,400	8.17
		10-11-06	Disposed of	122,600	8.11
Frank Kavanaugh	Director	10-03-06	Disposed of	178,600	8.55
		10-04-06	Disposed of	114,123	8.48
		10-05-06	Disposed of	287,277	8.11
Gordon R. McGilton	CEO	9-26-06	Disposed of	83,333	8.77
Ervin R. Scott	Director	9-25-06	Disposed of	190,736	8.90 – 9.10
		9-21-06	Disposed of	134,000	8.99 – 9.18
		9-22-06	Disposed of	129,500	8.90 – 9.05
Frank Kavanaugh	Director	9-15-06	Disposed of	599,640	7.48
		9-18-06	Disposed of	84,865	7.98
		9-08-06	Disposed of	309,000	7.02
		9-11-06	Disposed of	119,750	7.01
		9-12-06	Disposed of	119,750	7.36
Ashford Capital, LLC Frank Kavanaugh, Mngr.			Disposed of	1.0 M	Ongoing
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.