Sellers Retreat From DHB Industries

DHB Industries (DHB - commentary - Cramer's Take) has been on a roll lately, but it may still have further to climb.

Since I highlighted this maker of body armor and protective gear in January, its stock has more than doubled, as the good news flow scared the shorts and brought in new investors.

(This stock was also added May 26 to the Stocks Under $10 portfolio, which is published by TheStreet.com, operator of this Web site.)

The latest positive headline came last week, when the company announced a $239 million body armor contract with the U.S. Army. After that, I noted in Columnist Conversation that the stock could trade to $15 by year-end. That day it traded around $9, and already it's at $14.29. With the stock approaching that target valuation, I want to revisit my analysis.

I base my thesis on an expected $400 million in revenue this year for DHB. The company is targeting 27.5% gross margins and 14% selling, general and administrative expenses, or SG&A, so operating revenue should equal $54 million. DHB pays $1.4 million in a preferred dividend, and the tax rate should remain at 40%.

With these metrics, net income would equal $32.4 million. With 45 million shares outstanding, DHB can earn 72 cents per share for 2004. The company now trades at roughly 20 times this number. To compare it to its peers, Ceradyne (CRDN - commentary - Cramer's Take) trades at about 25 times 2004 estimates and Armor Holdings (AH - commentary - Cramer's Take) trades at about 18.

While I believe the new orders make DHB's $400 million sales figure feasible, the company will have to run its operations as efficiently as possible, both to make the gross margins goal and to keep SG&A at its target level. Chief Operating Officer Sandra Hatfield and her team will have to procure raw materials, operate a new plant and continue to make their customers happy. All of these activities will push operations management to new levels. I think she's up to the task, but with the stock climbing, any hiccup in the manufacturing process could create a new buying opportunity in the stock.

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At time of publication, Falk was long DHB Industries, although holdings can change at any time.

Jonathan Falk is a portfolio manager at M.D. Falk & Co., managing more than $60 million in equities and fixed-income. His analysis focuses on bottoms-up valuation of a broad range of securities, using discounted free-cash flow, enterprise valuation, earnings models and balance-sheet strength. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Falk cannot provide investment advice or recommendations, he welcomes your feedback and invites you to send it to [e-mail].