Sellers Retreat From DHB Industries

I'm not sure what additional cash or stock bonuses may be paid out this year. DHB employees and management have earned rewards, but the impact to the bottom line cannot be quantified right now. In addition, the Securities and Exchange Commission is looking into loans made to the company by CEO David Brooks. This investigation could affect Brooks and/or the company.

In 2005, DHB may be able to sell $500 million worth of goods. I assume that even with fewer soldiers in Iraq, all U.S. personnel will be equipped with DHB armor. American soldiers might be targets, no matter where they are stationed, and I think the troops will demand the best protection possible. Using the same margins as 2004, the company would earn more than $1 a share for 2005.

As the stock price climbs, Brooks will entertain selling the company. An offer around $20 a share seems about right, if a potential acquirer believes the plan I laid out for 2005. I have sold about 10% of my position since last week's news. I would buy back the stock at $12 and continue to sell a little bit as the stock rises to $20.

---

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].