A New Kind of Safety Stock
The New Bubble?
By Matthew Goldstein
November 7, 2001
IN THE NEW antiterror sector, there are two distinct camps: the contenders and the pretenders.
The pretenders are the dozens of tiny public companies boasting dubious and untested technologies that supposedly can sniff out bombs or identify anthrax bacteria. We cautioned last month that sinking money into one of these companies is no less risky than taking a trip to the casino.
But in the wake of Sept. 11, spending on domestic security is soaring, and several real contenders — companies with innovative technologies that offer some practical solutions for protecting people against future terror attacks — are poised to benefit. The trouble, of course, is distinguishing them from their dubious cousins.
To make that task easier, we're taking a closer look at seven companies with high-tech gizmos that could be put into use right now in the war against terrorism. In compiling our list, we've identified some of these companies' strengths and weaknesses based on public filings and interviews with Wall Street analysts and security experts. The list is by no means exhaustive; rather, it's meant to serve as an example of the kinds of antiterror stocks that are likely to garner attention in the coming months.
Be warned, though: These stocks aren't cheap. One misstep could send any one of them tumbling back to preattack obscurity.
Food Technology Service (VIFL)
Product: irradiation technology
Stock Price on Sept. 10: $1.61
Stock Price on Nov. 7: $3.32
Gain: 106%
Risk Factor: most speculative
Comment: The company owns and operates a food-irradiation facility in Florida that uses gamma radiation to kill harmful bacteria, such as E. coli. Experts say it could be adapted to sterilize mail to kill anthrax and other deadly bioterrorism agents. But the company's ability to move beyond the food-processing business and into mail irradiation could be limited by the fact that it currently has only one facility, in Polk County, Fla., and shows little interest in expanding at this point.
There's also been concern about Food Technology's ability to continue as an independent company. In its most recent annual report, auditors raised some doubt about the company's ability to "continue as a going concern." And right now, it seems most of the talk about employing Food Technology in the war on terrorism is coming from Wall Street speculators. The U.S. Postal Service hasn't yet signed any contracts with the company.
Surebeam (SURE)
Product: irradiation technology
Stock Price on Sept. 10: $7.58
Stock Price on Nov. 7: $11.58
Gain: 53%
Risk Factor: speculative
Comment: The company is a spinoff of Titan (TTN), a major U.S. defense contractor, and Titan's close ties to the federal government have put Surebeam in a good position to capitalize on the mail-decontamination business. The U.S. Postal Service recently signed a contract with Titan to purchase eight of Surebeam's electron-beam irradiation systems for $26 million, and is considering buying up to 12 more. Stephen Levenson, an analyst with Gerard Klauer Mattison, says the initial contracts with the Postal Service may encourage other countries to sign on and should boost Surebeam's food-decontamination business, which he says will remain the company's main focus. Levinson notes that the anthrax scare should make more people comfortable with the notion of irradiating food.
Investors sure hope that's the case, since Surebeam has been a money-losing proposition thus far. During the first six months of this year, Surebeam took in $15 million in revenue while posting a $49 million net loss. Another potential red flag is a patent dispute brought by one of the company's main competitors, Ion Beam Applications of Belgium. The case, now pending in federal court in San Diego, could hurt Surebeam's long-term growth potential if Ion Beam were to prevail in its challenge to Surebeam's patent. (Ion Beam also has signed a contract with the Postal Service to begin sanitizing mail.)
Steris (STE)
Product: irradiation technology
Stock Price on Sept. 10: $19.47
Stock Price on Nov. 7: $23.12
Gain: 19%
Risk Factor: speculative
Comment: The company uses an array of technologies to sterilize medical and scientific instruments and also employs irradiation technology in decontaminating food and other products. Roughly two-thirds of its revenues come from the health-care industry. With more than 4,500 employees, Steris is by far the biggest and most diversified of the three irradiation companies. For the first six months of this year, it posted $13.6 million in net earnings. But it's not clear whether the company has much of a role to play in sanitizing mail. So far, Steris hasn't signed any deals with the Postal Service. It recently announced a partnership with Versar (VSR), an antiterrorism and emergency-management consulting company, to jointly market their services to corporations seeking protection from bioterrorism. But Hans van der Luft, an analyst with McDonald Investments, doesn't expect the company to garner any near-term boost in revenues from the war on terrorism.
InVision Technologies (INVN)
Product: explosives-detection device
Stock Price on Sept. 10: $3.11
Stock Price on Nov. 7: $12.43
Gain: 299%
Risk Factor: speculative
Comment: There's no doubt that InVision stands to benefit from the Sept. 11 terror attacks. It and L-3 Communications (LLL) are the only companies approved by the Federal Aviation Administration to make explosives-scanning machines for U.S. airports. So even though the aviation-security bill remains stalled in Congress, there'll be added demand both in the U.S. and around the world for InVision's CTX series scanners. And that's good news for both companies, since these machines aren't cheap — each one costs around $1 million. In the past few weeks, InVision has gotten new orders from Israel and Sweden for $5 million in machinery. Right now, it has about 230 machines in use around the globe.
On the downside, it's taken InVision a long time to get its act together on the fiscal front, despite a load of money from the FAA, which actually buys the scanning machines. The company, founded in 1990, wasn't profitable until 1997. It dipped back into the red last year, with a net loss of $1.8 million, though for the first nine months of this year it has posted net income of $680,000. One big concern is whether the company, with roughly $40 million in working capital and about 350 employees, can ramp up fast enough to meet the demand for new scanners. The company says it can roll out 50 machines a month if it shifts to an around-the-clock production schedule.
L-3 Communications (LLL)
Product: explosives-detection device
Stock Price on Sept. 10: $63.00
Stock Price on Nov. 7: $91.10
Gain: 44%
Risk Fact: speculative
Comment: Like InVision, L-3 stands to profit from the events of Sept. 11. That's because current federal law requires the FAA to buy an equal number of scanners from InVision and L-3. Of course, this one-for-one formula could change if another competitor with similar or better technology emerges. And that might happen, since airport-security personnel have complained about a high rate of false alarms with L-3's machines. But if L-3 can iron out the kinks, it might be able to meet the world-wide demand for bomb sniffers better than smaller rival InVision. With 14,000 employees, L-3 is a major defense contractor, supplying sophisticated communications and telemetry equipment to the Defense Department. And with a market cap of $3.5 billion and net income of $37.5 million for the first half of this year, it doesn't face the same production and capacity concerns as InVision.
Visionics (VSNX)
Product: facial recognition
Stock Price on Sept. 10: $4.27
Stock Price on Nov. 7: $15.40
Gain: 260%
Risk Factor: most speculative
Comment: Right now, Visionics finds itself in the enviable position of having few competitors for its facial-recognition software. But that may be because up until now there hasn't been a lot of demand for its product. Sales during the first nine months of this year totaled just $23 million. Visionics says two companies account for 29% of its revenue. At the moment, the casino industry is one of the biggest buyers of facial-recognition technology. The industry maintains a shared database of photos of known con artists and uses facial-recognition technology to spot would-be cheaters in casinos.
But despite a lot of hype and a recent decision by Boston's Logan Airport to experiment with Visionic's FaceIt software, it's not clear just how valuable facial-recognition technology will prove in the war against terrorism. Critics like Richard Smith, a Boston-based security consultant, say facial-recognition technology sounds good in the abstract but can do little to stop criminals or terrorists if their photos aren't part of a big government database. Smith notes that most of the 19 hijackers on Sept. 11 weren't listed as known terrorists.
Viisage Technology (VISG)
Product: facial recognition
Stock Price on Sept. 10: $1.94
Stock Price on Nov. 7: $11.41
Gain: 488%
Risk Factor: most speculative
Comment: The only material difference between Viisage and Visionics is that Viisage is a spinoff of Massachusetts-based Lau Technologies, a U.S. defense contractor and vendor to several major aviation companies. Lau still owns 40% of Viisage's stock, and its ties to the defense and aeronautics industry could give Viisage a slight advantage in securing deals with airports in the U.S. and around the globe.
We'll be on the lookout for more antiterror contenders in the coming months. But next week, we'll handicap some of the publicly traded consulting firms that are trying to tap into corporate America's fear of terrorism.
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