BARRY JAMES
PRESIDENT JAMES
ADVANTAGE FAMILY OF FUNDS

COMPANY: Armor Holdings
TICKER: AH (NYSE)
PRICE: $58.66 (as of 4 p.m. yesterday)
52-WEEK RANGE: $33.03-$61.69
MARKET CAPITALIZATION: $2.07 billion

Barry James is the president and portfolio manager of the James Advantage Family of Funds. Florida-based Armor Holdings manufactures and distributes vehicle armor and security systems for law enforcement, military, and commercial applications. Mr. James spoke to David Dalley of The New York Sun about why AH is one of his favorite holdings.

What does Armor Holdings do?

They basically armor-up Humvees with steel plating and bullet proofing. They just got another contract from the Army for about $27 million to continue doing that. They also do work in Europe, Africa, and Asia, and they’re the only ones doing this kind of work for these vehicles. They just bought Stewart & Stevenson, which is a producer of transport vehicles, so they’re not just doing add-on work anymore, they’re now also into production. One of the reasons the stock had been trading down in the 10-12 [multiples] range relative to other defense stocks, which trade at around 20, is that everyone figured that eventually we’ll leave Iraq and that that’d hurt business. This new acquisition is a way of addressing that and extending their useful life. Stewart & Stevenson has been around for about 100 years, and they have long-term contracts in place with the U.S. Army. They’ll be around for a long time.

Apart from the new acquisition, what are the fundamentals like?

The stock is trading at less than 15 times earnings, and earnings are growing rapidly. We’ve seen consistent positive surprises over the last few years and no negative surprises. The share price is up 60% in the past year alone.

Given the rise, is now still a good time to buy?

There are two things to keep in mind. First, what’s important to us is relative strength.A stock that’s outperforming the market will likely continue to do that. You hold onto winners, and sell losers.And we love adding to a winner as long as it meets the standard of good earnings and good valuation. This has both of those components, and this addition of Stewart & Stevenson removes a degree of hesitancy from the market. They’re not just a one-trick pony. I think the acquisition was a very good move. It shows that management is thinking long term, not short term, and we like that.The acquisition might be a short-term hit on earnings, but in the long term it will be accretive.

What are the risks?

That there’s peace in our time, I guess! Really it’s all up to defense spending. If we had a significant shift in the political climate, and in the national support for the military, and went back into a drawdown phase, then that wouldn’t be good for them. Otherwise, they’ll do fine.