July 22, 2009 - 7:41pm EST by
2009 2010
Price: 9.88 EPS $0.45 $0.52
Shares Out. (in M): 33 P/E 21.9x 19.0x
Market Cap (in $M): 320 P/FCF negative negative
Net Debt (in $M): 0 EBIT 30 35
TEV ($): 320 TEV/EBIT 10.6x 9.1x
Borrow Cost: NA

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When it rains it pours... This high fixed cost business saw sales fall in half, and then on June 30 it lost its biggest government contract... things are unraveling fast.  Spartan is a short because analysts have numbers too high, and the company is about to guide lower as both the new vehicle business and the parts business tank. 

Spartan makes chassis for heavy duty vehicles such as fire trucks, motorhomes, trolleys, utility vehicles, and specialized military vehicles.  "Chassis consist of a frame assembly, engine, transmission, electrical system, running gear (wheels, tires, axles, suspension and brakes) and, for fire trucks and some specialty chassis applications, a cab. Spartan Chassis customers are original equipment manufacturers ("OEMs")."  Beyond chassis, they make the aerial ladders and pumps for fire trucks, and cabs for fire trucks and emergency vehicles.

Municipalities are hurting to a degree unseen in recent decades so budgets for ambulance/rescue/fire vehicles are tight.  Motorhomes are experiencing a similar contraction, with customers like Fleetwood filing for bankruptcy in May, which likely toasted some accounts receivable, and other customers hanging on by a thread.  In addition, roughly half of such sales are dependent on financing availability.  2008 Revenue was 844m.  Q1 09 was 115m down 56% from $264m in the prior year's Q1.  Comparable backlog at the end of Q109 was 169.7m down 55% from 304.6m the year before (although they reported 217.5m by adding service parts & accessories for the first time of 47.8m).  This backlog is subject to cancellation and/or rescheduling by customers.  Chassis unit orders were down 64.5% for the quarter year over year.  Management said Q2 began with a decent April (tarp/gov stimulus fueled) although May & June didn't follow through. 

 Lost a big order
The stock price ran until the end of June in expectation of a huge order from the military for the MRAP program (armored all terrain vehicles) to which they supplied over 550 chassis last year as a subcontractor to BAE and a JV between Force Protection and General Dynamics.  At the end of June SPAR and its GC partners lost out when that order (1.05 billion dollars for 2244 vehicles) went to Oshkosh (OSK).  So now their new vehicle biz goes to zero.  Analysts still expect the parts & accessories business to come through strongly, however the DOD is moving most of those currently in-field vehicles out of forward areas in Afghanistan and into Green Zone Iraq where they'll be used for behind the front line logistics & supply purposes.  Instead of being in off road combat situations, those vehicles will be driving on pavement and used for deliveries.  Management refrains from full public disclosure, but did say the DOD changes means parts will likely be down "around 30%"... that's an 18m sales drop quarterly before drops in fire truck, mortorhomes, and emergency vehicles. 

The market cap is 320m, as is Enterprise Value with debt and cash of approx 27m each.  TTM ebitda through March was 61m on a sales volume that they will not sustain going forward.  2009 street ebitda estimates of 38m seem rather optimistic at 8.4x given the sales deterioration followed by the loss of the MRAP business. 

Fixed costs can't be taken out as promptly as they are losing sales so 2009 & 2010 margins will take a big hit.  In Q1, SG&A rose y/y from 4.8% of sales to 10.7%.  R&D spend rose from 1.8% to 4.1% as they continue to prepare product innovations (which, to their credit, will help future sales... someday).  They are getting some benefit back from lower COGS and squeezing out some working capital (14m FCF in Q1, but ahead of 11m ebitda), but not meaningful amounts given the size of the business shrink and these are one time benefits that will not continue quarterly.  Capital spending will continue in the 12-15m range annually.

So when it rains it pours and I think they have to reach 5x ebitda of 30m in this environment while the business is still deteriorating, which implies the stock gets cut in half.


Reports tomorrow

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