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Published: April 23, 2010
Are the world’s airports safer since
September 11, 2001? This overriding question now dominates
public discourse. In the wake of the terrorist attacks on that
fateful day, billions have been spent to beef up airport
security.
The foiled terrorist attack last Christmas Day on a Northwest
Airlines flight bound for Detroit put a spotlight on airport
screening technology, creating a bonanza for aviation companies
with leading-edge security solutions.
Among the competitors vying for a slice of the growing airport
security pie, one entrepreneurial company stands out for its
investment fundamentals and innovative technology: Smiths Group
(LSE: SMIN).
Smiths is a British-based company involved in specialty
engineering activities, especially in aviation security. Based
in London, it’s listed on the London Stock Exchange and is a
component of the FTSE 100 Index.
Smiths is the world’s biggest manufacturer and seller of
scanners to detect weapons and explosives on airline passengers.
Significantly, the company specializes in the millimeter-wave,
or “full body” scanners now coveted by airport security
officials and under trial use in British airports.
Smiths is considered the leader in millimeter-wave full body
scanners, which are increasingly seen by security officials as a
“silver bullet” to address airport security concerns. Smiths’
scanners work by using low-level radio waves. Two rotating
antennae cover the passenger from head to foot with radio
frequency energy. In about 40 seconds, the scan produces a
negative-like image that depicts anything under a passenger's
clothing, including plastic, chemical explosives and
non-metallic weapons not revealed by conventional security
methods.
Smiths experienced a boost in contracts for aviation security
since the “underwear bomber” attack on Christmas Day, when a
Nigerian male onboard an airplane tried to ignite explosives
hidden in his crotch. In the wake of this highly publicized
incident, the United States, Britain and the Netherlands forged
ahead with aggressive plans for greater deployment of full-body
scanners. The United States alone plans to spend $529.3 million
in the fiscal year beginning Oct. 1 to acquire 500 of the
scanners and hire 5,355 people to operate them.
One consulting firm estimates that the worldwide body scanner
market is on track to exceed $1.6 billion in sales during the
next five years, or $320 million per year, with Smiths
potentially taking a share of about one-third, an amount equal
to more than 10% of today’s body scanner sales base.
Smiths Detection division, which makes body
scanners, represents 19% of group sales. The company also makes
a broad range of other security equipment and medical devices.
For the six months ended January 2010, Smiths Detection’s sales,
operating profit and
margin increased by +11.0%, +56.0%, and
+14.5%, respectively. If the world’s airports follow through on
their current plans to adopt full body scanners, it could boost
earnings per share at Smiths Group by +3 to +4% per year, based
on a five-year roll out.
Despite these strong trends in its favor, Smiths sports a
reasonable price-to-earnings ratio (P/E) of 15.9, which looks
especially attractive compared with the S&P’s average
P/E of
21.7. California-based OSI Systems (Nasdaq: OSIS),
parent
company of Smiths’ direct competitor Rapsican, has a P/E of
26.98. Smiths other major competitor in the scanner market is
L-3 Communications Holdings (NYSE: LLL), with a lower P/E of
12.7; however, L-3 is a broad-based defense contractor and an
indirect play on airport security, with less growth opportunity
in this niche than Smiths. The rest of the scanner field is made
up of a multitude of smaller players with less market presence
and lobbying clout - not to mention less advanced technology.
One potential downside to a Smiths play is the chance that
privacy and health advocates will prevail in their attempts to
limit use of these devices, but that is unlikely, given the high
security stakes involved. Airport security is an emotional issue
that puts pressure on politicians to guard human lives. The next
time there’s a major airport security lapse - and another
incident is virtually inevitable - look for a flurry of
political posturing and more public sums devoted to the sort of
specialized screening equipment at which Smiths excels.
-- John Persinos
Contributor
StreetAuthority |
