Suntrust Analysis on RFP
SunTrust Analysis on the RFP
Summary.
Last week, the U.S. Army and Marine Corps issued a joint Request for Information (RFI) to interested parties seeking information on industry’s ability to provide a lighter, more agile and maneuverable vehicle with MRAP-like protection capabilities. We believe this RFI was driven by a Joint Urgent Operational Needs Statement (JUONS) from commanders in the field; and according to our sources, the military aims to order a minimum of 372 vehicles with a potential maximum of 1,968. Considering the key performance criteria in the RFI versus the specs of FRPT’s Cheetah, FRPT’s ability to ramp Cheetah production, and FRPT’s now more established history of providing vehicles to the U.S. military, this could be the first significant opportunity for the Cheetah, in our opinion.
Competition:
We believe the original JUONS mentions two vehicles by name: FRPT’s Cheetah and the Oshkosh Sandcat. The Navistar MaxxPro Dash and the AM General ECV2, a Humvee derivative, will also likely be considered. However, we believe the competitive vehicles are at an earlier stage of development than the Cheetah which has had a prototype vehicle for over a year, already been tested under MRAP II, and could enter production within weeks. With replies to the RFI due by Sept 15th, we believe FRPT may have a slight edge over its competition due to product maturity and expect the receipt of an order of any magnitude for Cheetah to be a significant potential catalyst for the stock.
Potential Impact on JLTV Program.
Last week we attended a Center for Strategic and Budgetary Assessment seminar that discussed future defense budgets. The consensus view is that the military will have to make tradeoffs in the future between programs – the Army’s FCS program and JLTV may be two such programs. Furthermore, a recently published
briefing on the military’s tactical wheeled vehicle strategy suggested that at the currently anticipated JLTV price of about $420,000 each, the JLTV may be unaffordable. Thus, we expect top line budget pressure to force the Army to choose FCS over JLTV, presenting a substantial, likely multi-billion dollar, opportunity for winners in this MRAP “Light” competition to offer a less expensive JLTV-like alternative (despite potential JLTV prototype awards in October).
Valuation
FRPT currently trades at 5.0x our 2008 EPS estimate of $0.76 and 4.9x our 2009 EPS estimate of $0.78. Clearly, a considerable amount of skepticism exists in this stock today. However, as better visibility develops into FRPT’s
support and sustainment business, the outlook for the Cheetah, and international market, we expect the multiple to gradually expand. That said, we believe the stock could achieve a multiple of 15x our 2009 EPS estimate with only moderate visibility in the items mentioned above. Our price target of $14 is based on applying a 15x multiple to our 2009 EPS estimate of $0.78. Risks to achieving our price target include the potential for further uncertainty to develop in the US MRAP program, lack of success in the foreign market, and worse-than-expected adoption of the Cheetah.
