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Force Protection Treads Water

Melissa Davis

Force Protection (FRPT Quote) is holding its breath for a last-minute victory lap.

The deadline for the South Carolina-based defense contractor to win another big contract is looming, since the U.S. military is set to finish handing out its first round of awards for mine-resistant, ambush-protected vehicles (MRAPs) by the end of the month. The company has long been favored to dominate the MRAP program but has seen rivals, such as Navistar (NAVZ Quote), chipping away at its lead.

Indeed, late Thursday, none other than scandalized BAE Systems -- suspected of bribing foreign officials for other military business -- claimed one of the remaining first-round MRAP awards for itself. A U.S.-based subsidiary of the British defense giant landed a $212 million deal to supply 441 MRAP vehicles for the war on terror.

The award came just days after BAE revealed that the Department of Justice has launched a criminal probe of the company. Justice officials suspect that BAE may have funneled money to a Saudi prince in exchange for his help in securing an $86 billion weapons deal. The company has denied any wrongdoing.

BAE's new MRAP order took a toll on Force Protection in the meantime. Force Protection's stock, pressured this month by mounting competitive threats, fell more than 5% to $20.47 -- an eight-week low -- earlier Friday.

Force Protection fans remain upbeat nonetheless. Thomas Weisel Partners analyst David Gremmels on Thursday treated the BAE order as an expected development, despite the company's regulatory problems, and predicted another competitor win -- possibly by rival Oshkosh (OSK Quote) -- as well. But he still feels that Force Protection will control at least half of the MRAP program in the end.

Gremmels has an overweight rating on Force Protection's stock. His firm makes a market in the company's securities.

Even now, Gremmels notes, Force Protection still boasts 48% of the MRAP orders placed so far. Navistar commands a smaller 33% market share, despite winning the single-largest MRAP contract handed out to date, and BAE now follows with 14% of the current MRAP awards. For the time being, Gremmels' calculations show, Oshkosh still trails as a distant fourth with just 4% of the MRAP orders.

But Stanford Group analyst Josephine Millward feels that equation could rapidly change. She, too, believes that Oshkosh could soon emerge as a bigger player in the MRAP game. Meanwhile, she questions whether Force Protection will field all of the new orders that the company is gearing up to land.

"In order to meet this aggressive production schedule, FRPT would require another order of 1,300 units by July 1, another 1,000 units by October and 6,000 units by November," Millward wrote on Monday. "As we said before, it is possible for Force Protection to receive another 1,000 units-plus order if the fourth company does not pass the performance test.

"But we put the odds at less than 50%."

Like many, Miller suspects that Oshkosh -- which is partnering with a company run by Force Protection's founder -- could land the next big deal instead. Notably, Oshkosh partner Protected Vehicles boasts an offering that is uniquely capable of surviving so-called "explosively formed penetrators." Those weapons are now viewed as even bigger threats than the improvised explosive devices, or IEDs, that other MRAP vehicles effectively shield.

Protected Vehicles is already providing the military with dozens of its Golan trucks in response. But the company hopes to supply even more Golans, possibly with help from Oshkosh or another partner, going forward.

BAE's new contract could actually signal good news for the company. Interestingly, experts note, the award included no calls for BAE's RG-33L -- a rival to Protected Vehicles' Golan -- despite high expectations for the vehicle.

"A recent contract has put (BAE) solidly back into the competition, including a couple of promising niche orders," Defense Industry Daily wrote on Friday. "Nevertheless, the curious [omission] of the mainstream RG-33L orders remains one of the salient features of this contract."

To be fair, Force Protection has monopolized orders for Category II MRAP vehicles, which include both the Golan and the RG-33L, placed by the military so far. Indeed, based on Gremmels' estimates, Force Protection has sold five times as many Category II vehicles as all of the company's competitors combined. But Protected Vehicles, at least, has been taking steps to widen its own share.

"We have been putting the infrastructure in place to build serious numbers" of both Category I and Category II vehicles, Protected Vehicles CEO Garth Barrett told TheStreet.com earlier this month. "We know the urgency of the need, and we have the desire to meet that need to the fullest extent possible. ... We are poised to supply."