Since 9/11, the United States has sent our troops overseas, created the Homeland Security Department, and spent approximately the gross domestic product of a fledgling third world country for defense equipment and materials.
Follow the money is the mantra on Wall Street, and money has been flowing like manna from heaven into the military supply industry. So should you invest in defense-related stocks, or is the defense sector ready to throw up the white flag?
Armor Holdings Inc. (AH)
Snapshot: Holy defense shields, Batman! Armor Holdings, manufactures and distributes security products and vehicle armor systems for the law enforcement, military, homeland security and commercial markets.
- Whether it’s tactical armor, commercial vehicle armor or body armor, Armor Holdings is your home for…you guessed it, armor! Trading at only 13 times earnings, Armor Holdings is one of those rare stocks these days that is trading at a low enough price-to-earnings ratio to attract value investors.
- Just announced a $58 million contract to sell armored equipment and ceramics to the Marine Corps, Defense Supply Store-Philadelphia and the Army tank-automotive and armaments command. The Army also has an $18 million option for additional add-on armor.
- Earnings grew 52 percent in 2005. However, earnings are forecast to moderate to approximately a 10 percent growth rate. Should this number be a low-ball estimate or guidance is steered higher, this stock has plenty more room to fly.
- If the United States does any significant troops pullback out of Iraq, the short-term party for defense industry stocks may be halted. But don’t fret too much, as the war on terrorism continues in Afghanistan and potentially expands to Iran, Syria and North Korea down the road.
- A change in control of Congress may sway the amount of dollars allocated to defense. This story won’t be fully known until 2007 at the earliest, when a new Congress starts its political agenda.
- The budget deficit could catch up with us and interest rates might skyrocket, causing borrowing costs for defense to become so high that the government is forced to curtail expenditures.
DHB Industries Inc (DHB)
Snapshot: DHB Industries is an armor maker, too. Serving as a holding company, DHB manufactures and markets protective body armors for the military, as well as sports braces and supports for athletes, weekend warriors and consumers.
- Honesty compels me to tell you I can’t find a whole lot of nice things to say about this stock. But since I need to find something positive, I offer you this: Military publications often refer to DHB as the largest supplier of bulletproof vests to the Army.
- What else nice can I say about a company who’s CEO has allegedly taken stock proceeds from numerous insider sales to pay for his daughter’s $10 million Bat Mitzvah? O.K., here’s one certainly good thing; DHB received a $30 million order from the Army late last year.
- If founder, Chairman and CEO David Brooks gets sacked as a result of the accounting scandal and new management is brought in to clean house, it might be time for bottom fishers to reconsider this stock.
- As if the pros weren’t bad enough, quality control concerns have caused share prices to plummet like an out-of-shape cliff diver off the rocks of Acapulco, tumbling 73 percent in the past year. Ouch!
- Be leery of companies that have a hard time holding on to auditors and accounting folks, as the books might smell a bit cooked. DHB just switched auditors last April for the third time since 2001.
- Founder David Brooks is under investigation by the Securities and Exchange Commission for accounting irregularities. While innocence before guilt must be applied, there is still too much dirty laundry surrounding this stock for most investors to touch it, even if you are wearing a full set of DHB body armor
Ceradyne Inc. (CRDN)
Snapshot: Ceradyne engages in the development, manufacture and marketing of advanced technical ceramic products and components for defense, industrial, automotive/diesel and commercial applications.
- Recent $9 million order from the Marines may pale in comparison to DHB’s $30 million order from the Army at first blush, but Ceradyne doesn’t come with the baggage of a SEC investigation. Oh, and did I mention that Ceradyne also recently received a $60 million order as part of its $462 million open-ended contract awarded by the government way back in August 2004?
- Earnings are expected to jump 54 percent for 2005 and another 37 percent in 2006. Not too shabby.
- Ceradyne has blown away analyst’s estimates on earnings by an average 4 cents per share over the year. While some can say that the company is just being overly conservative in order to beat expectations, you still have to love a stock where the surprise is consistently to the upside.
- Company had a ton of debt on its books – $110 million – with only about $12 million of cash on-hand at last report. Hopefully, the surge in sales in the past year has worked to alleviate that problem.
- Recent debt and stock offerings in the market have the potential to dilute Ceradyne shares, possibly causing its recent stock price climb to run out of steam.
- Now that the company has $200 million in the coffers from the stock offering, will shares be weighted down by a potential acquisition?
* Price quotes are from February 21, 2006.
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