Insightful analysis and commentary for the US and global equity investor
Contributors: Douglas McIntyre Jon C. Ogg

Previous Posts

Friday, October 20, 2006

No News is… No News For Armor Holdings

By William Trent, CFA of Stock Market Beat

Investors in vehicle armor provider Armor Holdings (AH) doubtless remember the 10% dive the company’s shares took a couple of weeks ago when the company pre-announced that the current quarter’s earnings would be below expectations.
At the time, we said:
The fact that Armor is down more than 10% on an apparently minor and supposedly temporary reduction to guidance is due largely to the fact that the “timing of revenue” argument appears suspect. If it were really just a timing issue, wouldn’t it be made up in the fourth quarter (thus rendering the full-year guidance reduction unnecessary?)

Until that gets ironed out, possibly on the earnings conference call, investors are likely to shy away from Armor Holdings.

We were wrong (to some extent.) Investors didn’t shy away from Armor Holdings, as the stock regained nearly half of the preannouncement-related losses. Of course, those investors were also burned when the shares fell right back to the bottom upon release of the actual report.

From MarketWatch:
Armor Holdings, which makes armor for U.S. troops and vehicles, late Thursday posted a decline in third-quarter profit as the company absorbed its acquisition of military-truck manufacturer Stewart & Stevenson.

Armor Holdings shares closed ahead of the report with a 4-cent gain at $55.64 before falling to $54.38 in after-hours trading.

The company reiterated its earlier full-year earnings forecast of $3.55 to $3.65 a share.
So, two weeks later and the news still means the stock is worth $54 in the market’s eyes. So was there anything noteworthy in that conference call? Yes and no. Here management describes what went wrong:

First, we experienced delays in the third quarter shipments of both supplemental armor for the M1114 Up-Armored HMMWV program as well certain soldier equipment programs. We now expect these deliverables to ship in the fourth quarter and in fiscal ’07. The schedule change was primarily the result of revived design specification as well delays in the receipt of component parts from suppliers.

Hmm… so how come the fourth quarter guidance is unchanged?

Second, armored military vehicle spare parts volumes were lower than originally expected. Order volume from the army was lower and volumes were also negatively impacted by increasing competition in particular for transparent armor or ballistic glass.

Thirdly, the third quarter in a row, commercial armored vehicle production volumes continued to be weaker than expected, driven by the ongoing base chassis availability issue as well as weaker than expected demand out of the Middle East. Because of these particular issues, we have lowered our expectations for both spare parts volumes and for commercial armored vehicle production in the fourth quarter.

Oh, we see. Management then goes over a littany of other mishaps, all of which sounded to us like the typical setbacks any business is likely to face in any given quarter. In our opinion they should have had no impact on guidance.

Management concludes:
In spite of the challenges I have just described we have not changed our outlook, our outlook for earnings in the fourth quarter and now expect earnings per diluted share of $3.55 to $3.65 for this fiscal year. As for fiscal 2007, we have provided back in June of $4.80 to $5.20 per share and we do not intend to reiterate or update this guidance early next year. We are currently in the midst of our 2007 budgeting cycle which is scheduled to complete in early to mid January. We believe there maybe considerable opportunity for us in the 2007 federal budget distribution.

However, this was substantially anticipated in our 2007 guidance provided in June.
So long story short, the setbacks were not temporary timing issues, at least on a net basis. This is okay because as we noted two weeks ago, the street didn’t believe they were temporary anyway. Which is why they are now right back where they were then.

The author may hold a position in the securities discussed. A current list of the author's holdings is available here.

Powered by Blogger