Nancy Suits Up with Armor

07/01/2005 12:00 am EST

Focus:

Nancy Zambell

Editor, Wall Street's Best Investments and Wall Street's Best Dividend Stocks

"Many defense-related businesses are growing exponentially," notes Nancy Zambell. "No matter how you feel about the war, these stocks are trading at unbelievably low values right now. Result: Time to bargain hunt." Here, she adds some armor to her portfolio.

"DHB Industries (DHB ASE) is a powerhouse in the body-armor industry. In its niche, DHB owns 80% of the military, 60% of the federal agencies, and 40% of the law enforcement marketplaces. And because there are significant barriers to entry, such as long and excellent customer relationships, rigorous standards of compliance/certification, and significant research and development costs, the company's reign at the top should continue for a long time. The company makes three types of body armor: Concealable, worn beneath the user's clothing; Tactical, customizable armor that is worn externally; and Military, made to military standards, specific to the mission.

"The company's pioneering concepts have resulted in the ramp-up of significant military contracts. Last year, the company picked up a couple very important pieces of military business. It developed the Armor Protection Enhancement System for the Marines and the Deltoid Auxiliary Protection System for the Army. These products add protection for the under arm, shoulder, and upper arm. The company was rewarded with a three-year contract for both. Its Interceptor Outer Tactical Vest garnered its biggest order, and the largest soft body-armor order for any company. It has an exclusive three-year contract with the US Army, worth $100 million. And last month, DHB received a $5.2 million order to deliver protective suits to the Army's Countermine Ensembles, a team that clears and disposes of land mines.

"Business is booming with more opportunities for DHB to profit. Although Congress is again making noises about cutting defense spending, including closing military bases, history has demonstrated that while they will cut with one hand, they will increase spending far beyond the reductions with the other. Pressing, immediate needs, such as the current Iraqi war- always find the funding. Additionally, the armor business for law enforcement agencies is escalating. According to the FBI Uniform Crime Report, 1,339 officers have been killed with a firearm since 1980, and it is estimated that 42% of them would have been saved had they been wearing body armor. In addition, the financial implications cannot be ignored. Vests cost about $400, but the cost to a law enforcement agency for an officer's death can add up to an average of $1.3 million. Another great incentive for the growth in vests.

"All in all, DHB is in the catbird seat to benefit from the growth in military and law enforcement spending. Its Sports Group is gaining ground, providing protective athletic apparel and equipment, including knee, ankle, elbow, wrist and back supports and braces. The sports group's gross margins average 33% across the board, contributing significantly to the company's overall profitability. Right now, sports medicine is a $300 million annual market and is rapidly expanding. And DHB has a good foothold to benefit nicely from that growth.

"DHB's strong financials provide flexibility for the future. First quarter earnings rose 21.4%, while its revenues grew by 14.9%. DHB has shown year over year increases in quarterly revenues for 20 consecutive years. The stock, along with the rest of the industry, have recently retraced their previous gains and are now an unbelievable bargain. But I don't expect that situation to last long. Trading near its 52-week low, the stock has excellent prospects for appreciation. I recommend that you buy DHB at a price no greater than $9 per share. And I suggest that you keep in mind a stop-loss of 20% less than your purchase price."

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