Armor Holdings Deserves a Look

Defense Market Report
By James Smith
June 5, 2006

New York Stock Exchange-listed Armor Holdings Inc and Stewart & Stevenson Services Inc, also listed on that exchange, have completed their merger on May 25. The deal is valued at about US$1.1 billion.

Florida-based Armor Holdings is a diversified manufacturer of branded products for the military, law enforcement, homeland security and personnel safety markets, including vehicle armor systems. The company is a prime contractor for the US military's tactical wheeled vehicle fleet.

Stewart & Stevenson Services is primarily engaged in the design, manufacture and service of medium and light tactical vehicles for the US Army and others worldwide.

The deal provides substantial synergies for Armor Holdings. While the company manufactures armor components, Stewart & Stevenson manufactures the vehicles on which Armor will add its products. The combined company will have the capability to produce finished armoured vehicles.

Armor Holdings estimates that about 40 per cent of the US Army’s truck fleet is made up of the midsize transport trucks, with 50 per cent made up of Humvees, with the balance made up of heavy-duty trucks. Armor Holdings supplies armor for all three types of vehicles. The company also has a division that provides protective shielding for government and private passenger vehicles.

Under terms of the agreement, Stewart & Stevenson shareholders will receive US$36.50 per share in cash.

Armor Holdings financed the transaction with a US$825 million credit facility that includes a US$425 million revolving credit facility, a US$300 million interim term loan and a US$100 million term loan.

On June 1, Armor Holdings traded at US$58.56 per share, against a 52-week high of US$65.11 and a 52-week low of US$36.56.

On May 16, prior to the transaction closing, Stewart & Stevenson traded at US$36.45 against a 52-week high of US$37.03 and a 52-week low of US$20.00.

Over the last several months Armor Holdings has received a number of orders from the US military: a US$87.4 million order for armor components on May 31; a US$31.5 million order for armored vehicles on May 17; a US$11.6 million order for ceramic body armor inserts on April 26; and, a US$16 million order for armor components on April 5.

Previous orders this year from the US military totaled about US$250 million.

Consensus analyst estimates put Armor Holdings stock at between buy and hold, with estimated growth at about 4.50 per cent over the next three years.

Over the last five years, Armor Holdings has had a growth rate of just over 49 per cent.

For the 12 months ending March 31, the company’s EBITDA reached a nine-year high of US$275 million, an increase of 31 per cent over the previous year.

The company expects revenues to reach US$1.7 billion this year, exclusive of the Stewart & Stevenson acquisition, an increase from US$1.63 billion last year.

Armor Holdings is expected to continue to land US military contracts as there appears to be a continuing demand for armor-plated vehicles as well as for individual soldiers.

When the war in Iraq is over, the US military is expected to maintain a presence for some time, and that presence will include the use of armored vehicles.

Disclaimer
James Smith is an independent columnist for this web site. James Smith may hold long or short positions in any of the stocks mentioned in this article and those positions can change at any moment. InvestorIdeas.com Disclaimer: www.InvestorIdeas.com/About/Disclaimer.asp, InvestorIdeas is not affiliated or compensated by the companies mentioned in this article. James Smith is a freelance writer. Nothing in the articles should be construed as an offer or solicitation or recommendation to buy or sell any specific products or securities. Past performance does not guarantee future results.