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Security firms see long-awaited windfall
NEW YORK (Reuters) -- With the U.S. government issuing new terror warnings and Senate passage of the homeland security bill, small companies providing screening systems and other specialized protection services are poised for the windfall they've anticipated ever since September 11, 2001. Airport security firms have already benefited, but money is beginning to filter down now to other parts of the industry. It's been a long time coming, some say. "It's been a very frustrating year," said Marty Roenigk, chief executive of CompuDyne Corp. , whose Attack Protection unit outfits federal and commercial buildings with blast-resistant windows and doors. Last week, the House of Representatives overwhelmingly passed legislation to create a Department of Homeland Security, freeing the bill from a dispute over worker protection. Still, analysts warn that it may be months or years before any benefits of the new $37 billion department, which combines 22 existing federal agencies under one roof, are disbursed. Waiting for windfallInvestors are taking a wait-and-see approach to the sector, perhaps chastened by the rush into these stocks last fall. When trading resumed on September 17 last year, security stocks shot up. But they soon lost many of those gains as investors failed to see an immediate infusion of cash into the companies. "These stocks had a good run-up at the end of last year," said Timothy Quillin, security sector analyst at Stephens Inc. "But I'm not sure people have known what to do with them this year," he said. Since this month's elections bolstered Republican power in Washington, some security stocks have moved higher. "I would've expected we'd see more of a benefit," said Quillin. Instead, more of the security premium so far has gone to large defense and aerospace companies. The security sector "is trading at a huge discount to the defense group," said Brian Ruttenbur, an analyst with Morgan Keegan. Industry fragmentedAnalysts are quick to point out that, in this fragmented industry, different companies will reap gains at different stages of the process. Shares of InVision Technologies Inc., which makes airport bomb detection equipment, reached a high of $49.76 in March, when the government started doling out airport security contracts. They've since fallen about 40 percent. Shares of OSI Systems Inc., which also makes security screening equipment, hit $28.97 at around the same time, but have dropped 46 percent since then. Firms like Kroll Inc., which do security consulting, benefited from the first waves of spending. In 2002, revenue in Kroll's security unit grew by 35 percent. The government has "to do the design first, or they have to do the training first. So we get the first edge of it. And we are seeing it," said Michael Cherkasky, Kroll's CEO. Kroll, which has already received several million-dollar contracts, is expecting 15 percent growth in the security area next year. Kroll had formerly avoided government work in favor of higher-margin private sector business. "The government didn't pay as well," Cherkasky said. But now "they have more immediate needs and they're willing to pay for high quality." Kroll's shares have fallen 24 percent, to $19.03, since reaching a 52-week high of $25 in July. Meanwhile, the companies themselves are still waiting for investments to pan out. Soon after September 11, CompuDyne invested $3 million on a plant in Montgomery, Alabama, to double its capacity. But the new contracts didn't arrive, and the plant sat underused. "The worst part is, we haven't needed it," said Roenigk. "It's been a big drag. We hired people to run it prematurely." That may be changing. CompuDyne recently announced a $1.6 million contract to provide security windows and doors at the U.S. embassy in the Ivory Coast, a recent political hot spot. The company also received a $2.8 million contract to outfit a new government building in Washington, DC. Consolidation expectedLooking ahead, analysts project that airport security will soon be overshadowed by a focus on ports and borders, which will benefit companies that make X-ray equipment like OSI and American Science and Engineering Inc. Last month, OSI received a $2.2 million contract for a cargo screening system. "The longer-term opportunities are in port security, maritime security and protecting our borders with Canada and Mexico," said Steven Gish, a Roth Capital Partners analyst. Analysts also say the bulk of federal money will go to huge defense contractors like Lockheed Martin Corp. and Boeing Co. -- companies that are used to billion-dollar contracts. Smaller firms may see runoff from that money, though. The defense giants "don't have the ability to execute," said Roenigk. "They have to go to people like us to actually provide the products." That may well lead to more acquisitions, said Ruttenbur. There have already been four acquisitions in the ports and borders business in only the last six months. L-3 Communications bought PerkinElmer Inc.'s detection systems business in June, General Electric Co. bought Ion Track Inc. in September, Britain's Smiths Group Plc acquired Rheinmetall's X-ray business in October and OSI Systems bought Ancore Corp. Copyright 2002 Reuters. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.
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