Spartan Motors, Inc. (SPAR)

Approximately a year ago, there was quite a bit of talk about the prospect of new military vehicles to replace the Humvee. The reason for the replacement was a very high rate casualties with respect to mines and other explosives that were under the vehicle. In many cases, our fine military men and women were either killed or severely wounded. The reason was that any major explosion under the undercarriage of a vehicle will increase in magnitude because the concussive force would increase over a smaller area. The old vehicles would push upward sending shards of metal and debris up into the passenger section.





A new design was developed with respect to these vehicles to deflect the force allowing it to go around the undercarriage and at a 45 degree angle. This decreased the chances of injury and/or death substantially. With the news of this, Congress acted fast to get these vehicles out to Iraq and Afghanistan. With... More Approximately a year ago, there was quite a bit of talk about the prospect of new military vehicles to replace the Humvee. The reason for the replacement was a very high rate casualties with respect to mines and other explosives that were under the vehicle. In many cases, our fine military men and women were either killed or severely wounded. The reason was that any major explosion under the undercarriage of a vehicle will increase in magnitude because the concussive force would increase over a smaller area. The old vehicles would push upward sending shards of metal and debris up into the passenger section.





A new design was developed with respect to these vehicles to deflect the force allowing it to go around the undercarriage and at a 45 degree angle. This decreased the chances of injury and/or death substantially. With the news of this, Congress acted fast to get these vehicles out to Iraq and Afghanistan. With major sums of money contracts were offered to Force Protection and the stock market thought it would be a huge winner. Well Spartan signed a deal with FRPT, and their stock went through the roof. FRPT would build the vehicles around the Spartan chassis. Spartan looked to be in quite well for a situation that looked like FRPT would get all of the smaller MRAP's. This was important as the first contract for $490 million went to FRPT. Both stocks rallied and looked to be in quite good at the time. At the time, the only thing known was that there were going to be at least $7 billion in contracts to produce the vehicles. Then it was found that Oshkosh was going to do all of the large vehicles and Navistar was awarded a contract for almost $700 million. The Government stated that they needed the contracts quick to save the lives of our military so they were afraid FRPT would not be able to keep up with production, not only that they said that FRPT might not be able to maintain them. Force Protection signed a deal with General Dynamics to help get more contracts but it didn't help the stock was pulverized. Along with it, Spartan was also crushed.





Since June 6th the stock has fallen over 67%. This seemed rational, but it was not expected that Spartan would get more work from the additional General Dynamic's contracts and also BEA. They are now providing these specialized chassis for almost all of the smaller MRAP's. We also need to remember that we will need more of these vehicles as they are damaged and or destroyed, plus there is a rumor that the United State's military, if pulled out, will leave the vehicles in Iraq. This would leave more orders for machines in Afghanistan as even the Democrats want us to focus our strategy there.





It seems that Spartan has just begun to realize the benefit of these military contracts as they just reported earnings for the first quarter of 2008 and they blew it out. They beat earnings estimates by over 64%. Net sales increased 11% over the fourth quarter. EPS was up 80%. Gross margins increased over 20%. They also had a great quarter before as they beat by over 30%, which was a large surprise after missing badly for two quarters before. Year over year the companies revenues increased 84% and earnings over 105%.





Spartan has stated their $237 million backlog will all be finished by the end of the year. In April of 2008 they were awarded another $45 million contract that they will start work on in 2009. Most importantly they have more work other than just military in their chassis business. Their motor home chassis work decreased over 31% and backlog sits at $17.5 million. Sales of their emergency truck chassis decreased 3%, but backlog is about $71 million. They stated in their conference call that emergency vehicle orders are improving and the RV market seems to have bottomed. They also anticipate orders from our allies as they begin to add these vehicles to their militaries. Over all backlog was down 5%, but I don't see that as a bad things as they are finally picking up the pace to get their production up as they are expanding facilities.





A few months ago the Street thought they were crazy for starting a 250000 share buyback plan; these new earnings lead me to believe they saw this coming and I am excited about this company's future. Even after a good week, the company still trades for just 10 time's forward earnings. Even more important the company's earnings estimates seem to undervalue the company. Current estimates have revenue at $193 million per quarter for the next three quarters (on average). That is $372 million in backlog or two thirds of current backlog figured in. With these numbers, the current one year PEG ratio sits at .3 without any modifications to analyst expectations. This stock is an excellent trade for the next six months, as additional deals are bound to come through.