Bullet Proof (AH, BAESY, FRPT)

By Dean Lundell | May 11, 2007 AAA

The basic fact is that when someone is shooting at you, the first thing on your mind is going to be finding cover or protection. When the military puts troops on the ground in a hostile-fire situation it has to protect them. These companies do just that by providing armor plating and blast protection to those at risk.

Taking Cover
Armor Holdings (NYSE: AH) has agreed to be acquired by British defense and aerospace company, BAE Systems (OTC: BAESY) for $4.1 billion or $88 per share. This represents quite a premium over the $2.8 billion market capitalization AH had prior to taking cover behind BAE.

Even more intriguing is the fact that Armor Holding's revenue, operating income and earnings had all turned considerably south over the past three years while the price of its shares went considerably north.

Armor Holdings primarily manufactures tactical wheeled-vehicles with armor protection for military customers. It also produces products for police departments and commercial applications where blast protection is required, although this segment only accounts for roughly 15% of the firm's revenue.

Going forward, Armor Holdings has joined with Lockheed Martin (NYSE: LMT) to compete against three other teams for the Joint Light Tactical Vehicle, or JLTV, which will replace the Humvee - a $10 billion program. Armor Holdings continues to be the provider on the Family of Medium Tactical Vehicles (FMTVs) until 2008.

BAE Systems is the fourth-largest defense contractor in the world and the largest in Europe, with a market capitalization of $126 billion. BAE Systems is the combined entity of the merger of British Aerospace and Marconi Electronic Systems, a defense component of General Electric (NYSE: GE).

The company manufactures military aircraft, naval systems, electronic intelligence systems for command, control, communications, surveillance and reconnaissance. It also has partnerships with the biggest names in aerospace. Why would it want Armor Holdings? Obviously for an entrée into the JLTV bidding as well as armor protection for Boeing's (NYSE: BA) F/A-18, Northrop Grumman's (NYSE: NOC) F-14, General Dynamic's (NYSE: GD) F-16, Lockheed Martin's F-35, the F-22 rotary wing combat aircraft and so forth. BAE estimates that the 36% of its revenue it now derives from the United States will expand to approximately 42%. On a global basis, why deal with just one defense department when you can deal with dozens?

The Competition
Force Protection (Nasdaq: FRPT) is the competition for Armor Holdings. It manufactures vehicles with ballistic and blast protection as well as lightweight body armor, particularly for special operations personnel. The firm also makes armor to protect against IEDs, improvised explosive devices.

FRPT is a relatively small company, with a market capitalization of $1.8 billion and $196 million in sales. Its growth in revenue has been nothing short of spectacular, coming in at 294% last year and 215% for the prior three years. However, its margins are fairly slim at just under 19% gross and 9.3% net.

Facts and figures on a defense contractor are often classified and can be impossible to come by. The company has recently entered into a joint venture with General Dynamics Land Systems for what one must assume is an undisclosed project.

A Fact of Life
We have come a long way from the steel pots and flak jackets of even thirty years ago. It is perhaps a sad commentary on our world, but, as long as we build weapons and have soldiers, we will have a need to protect them. These are three of the companies that produce the products that do that. Perhaps one of these shares will help protect your holdings.

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