Despite uncertainty about reduced defense spending, General Dynamics (NYSE: GD - News) has agreed to buy smaller rival and armored vehicle maker Force Protection (Nasdaq: FRPT - News) for $360 million.
Small defense-dependent companies like Force Protection are in a vulnerable position given the current state of affairs in the defense sector. Bringing Force Protection under General Dynamics' bigger umbrella provides it some protection. Let's see what's in store for General Dynamics.
What's the deal?
General Dynamics is paying 31% premium for this company to boost up its "Land System" division that makes armored vehicles that are mine-resistant, ambush-protected, and enabled to deflect the impact of explosions. These products will complement General Dynamics' armored vehicle business.
Force Protection is known for its popular brands, such as the giant Buffalo, weighing 20 metric tons, and Cougar, the midsized model used for transporting troops. These vehicles are designed to protect soldiers against mines and hostile firing. Stable demand for the Buffalo brand through 2014 is expected along with new service contracts for the Cougar brand. This long-term visibility of Force Protection is one of the significant factors General Dynamics can expect to benefit from in the future.
Force Protection has a skilled workforce, which is known to provide high-quality support services. This will strengthen General Dynamics' ability to support assets deployed worldwide, giving it new opportunities to serve domestic and international customers.
Recently, Force reported its third-quarter results. Although its revenue fell by 19% to $143.6 million, earnings per share of $0.07 beat analysts' expectations of $0.03 per share. General Dynamics expects to benefit from this acquisition in terms of profits starting in 2012.
Despite the defense spending concerns in the U.S., the global defense demand scenario gives General Dynamics a reason to smile. Armored military trucks and related products, especially the ones used for protection against roadside bombs, have seen considerable growth in demand worldwide.
Showing that it's not solely dependent on the U.S. government, Force Protection recently received an order for 200 military trucks from the U.K., which is planning a follow-on purchase. Australia is considering a 1,300-unit order valued at more than $1.4 billion. New opportunities to rebuild existing armored trucks may be seen as the U.S. winds down its war operations in Iran and Afghanistan.
General Dynamics is exploiting the market needs well. It has done a good job winning some valuable contracts lately. The company bagged a contract of $87 million to build an underwater anti-mine vehicle for the U.S. Navy. Additionally, it received an ammunition order from the U.S. Army, and also a contract to produce combat ammunition for an international customer. The two contracts together are valued at nearly $64 million.
In its recent quarter, General Dynamics beat earnings estimates, though the same was true for competitor Lockheed Martin (NYSE: LMT - News). However, the recently won contracts and the merger with Force Protection should help the company stay ahead of competition.
The Foolish takeaway
General Dynamics seems to have its strategy in place. Recently won contracts and the current acquisition make me confident about the company's next quarterly results.
Navjot Kaur does not own shares of any of the companies mentioned in this article. The Motley Fool owns shares of General Dynamics and Lockheed Martin. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.