Force Protection ( FRPT) is having some troubles defending its turf. Shares plunged 8% Monday after rival Armor Holdings ( AH) scored a $519 million contract to supply the U.S. military with 1,170 Mine-Resistant Ambush-Protected vehicles. The surprise setback is the second in three months for Ladson, S.C.-based Force Protection. In late May, rival Navistar ( NAVZ) pulled off an even larger MRAP win. Force Protection bulls, who have been expecting the company to hog most MRAP contracts for itself, seemed rattled. Armor's contract win "was clearly a surprise, as most industry watchers had not expected any significant awards for AH," Thomas Weisel Partners analyst David Gremmels wrote on Friday. The deal "is clearly a negative for FRPT, which now faces another potential competitor ahead of large Army orders in 2008." Force Protection's stock, which peaked above $31 a share less than two months ago, dropped $1.89 to $21. Gremmels continues to embrace Force Protection's stock nonetheless. His firm makes a market in the company's securities. Notably, Gremmels still believes that Force Protection will monopolize orders for Category II MRAP vehicles even if the company -- facing stiff competition for Category I orders -- fails to dominate the MRAP program overall. "Force Protection's Cougar vehicle dominates the Category 2 MRAP vehicle market, being the only contractor awarded volume production since testing wrapped up at Aberdeen, but it has not been able to maintain such a hold over Category 1," Gremmels acknowledges. "As a result of the continuing fierce competition for Category 1, which we estimate will compose 70% of the MRAP buy (assuming the Army follows through on its full plan for 17,700 vehicles, all Category 1), we are reducing our estimated market share projection for the Cougar from at least 50% to 40% of the MRAP market."
Even so, Gremmels has kept his earnings forecast for the company intact. "Although our model has lost some of its conservatism by the addition of an unexpected contender to the production competition, we continue to believe it is achievable," he states. Moreover, "we suspect competitors have been making aggressive production promises -- potentially working to Force Protection's favor if they are unable to deliver." Of course, some have been looking for Force Protection to stumble instead. Notably, back in May, Stanford analyst Josephine Millward predicted that none other than Armor Holdings might steal some MRAP business. Specifically, Millward suggested that Armor could snag a $500 million MRAP contract. Since then, Millward has hinted at additional threats for Force Protection as well. She made her latest call this month, when the military laid out plans for a new MRAP II program seeking stronger vehicles -- capable of surviving threats from "explosively formed penetrators" -- that Force Protection could struggle to supply. "The uncertainty related to total MRAP demand and the new MRAP competition are both risks to Force Protection, as the consensus expects a total MRAP demand of 23,000 units with the company taking 40% to 50% of the market share over the next two years," Millward wrote. In contrast, "the new MRAP competition is positive for a company like Ceradyne ( CRDN), as it has developed an armoring kit called the 'Bull' to protect vehicles from EFPs," she added.
"It is also potentially good news for companies that have yet to win a major MRAP production award because it provides them with another opportunity to improve their designs," she added. "These companies include General Dynamics ( GD), Oshkosh Truck ( OSK) and Armor Holdings." Millward does not formally cover most companies, including Force Protection, in the group. She does follow Armor, however, which she recently downgraded from buy to hold -- despite forecasts of a possible MRAP win -- due to valuation. Shares of Armor actually slipped 2 cents to $87.36 on Monday, following news of the big MRAP award. They remain within $1 of their all-time high.