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Scanning for value in InVision stock
Shares in scanning device maker soar, but investors beware
OPINION
By Christopher Byron
MSNBC CONTRIBUTOR
Nov. 21 — The news that President Bush has finally signed an airport security bill, and that money will now be spent to install check-in luggage scanning systems at commercial airports nationwide, is welcome news for one group if investors: the folks holding stock in an obscure California-based company called InVision Technologies, Inc.
INVISION’S STOCK HAD ALREADY soared 283 percent following the attacks of Sept. 11. And with the signing of the bill Monday, the stock has soared yet again, creating a gain of 583 percent in barely a month and a half’s time.
A run-up of that magnitude hasn’t been seen on Wall Street since the days of the dot-com bubble. And just as was the case with the dot-coms, it raises some troublesome valuation questions. Just how, for example, can InVision Technologies hope to justify the intergalactic price multiple of 122 times current earnings that it now sports?
WATCH OUT BELOW
The sad answer is that doing so won’t be easy, meaning that investors in the company’s shares could be in for a shock. Not only is the market for InVision’s scanning equipment limited as well as under the thumb of Washington bureaucrats, but there are also some obvious questions as to whether the devices — indeed, any scanning devices — can provide real security from the danger of a terrorist attack that blows a plane out of the sky by means of a bomb in a suitcase.
InVision Technologies is one of roughly half of dozen firms in the business of manufacturing and selling devices that scan check-in luggage for explosives before the luggage is actually placed on the aircraft. The entire sector has soared dramatically in the wake of the Sept. 11 attacks, but only two of the companies — InVision Technologies, and L3 Communications — have so far been approved by the Federal Aviation Administration to supply scanning devices to airports. InVision is the dominant player.
The company was founded in the wake of the mid-air bombing of Pan Am 103, in which Libyan terrorists snuck an explosive aboard a Pan Am 747 flight from London to New York, blowing it out of the sky over Lockerbie, Scotland in Dec. of 1988.
In the wake of the bombing, Congress passed the “Aviation Security Improvement Act of 1990,” which among other things required the FAA to fund the development of so-called “Explosive Detection Systems” that would automatically detect bombs in passenger check-in luggage before the luggage is actually placed in the cargo holds of aircraft.
InVision went into business, initially it would appear, to harvest some of the FAA’s development money, and in 1997 it sold 2.75 million shares to the public in an IPO at $12 per share. The company’s basic product: a so-called CTX 5000 luggage scanner, which sells for roughly $1 million apiece, with the ability to scan luggage for concealed explosives at a rate of 300 bags per hour. At the time the company went public, nearly the entire business of the company consisted of orders financed by the FAA, including a 54-unit purchase — the company’s largest single order — by the FAA directly for itself.
NOT SO PROFITABLE
InVision Technologies, Inc. (INVN)
price change
18.54 -1.02
Since then, the company has booked revenues of more than $250 million. But actual net cash flows from operations during the period have been zero, suggesting that the business is frankly not very profitable on the 230-plus units that have actually been shipped. What’s more, the company’s production capacity looks to have been maxxed out for more than a year, with roughly 44 units having been shipped in the year 2000, leaving a $8 million backlog, followed by an estimated 24 more units having been delivered through September 30th of this year, with a backlog that has now grown to more than $24 million worth of as-yet-unfilled orders.
The small size of the company — with less than 60 people engaged in manufacturing at the start of the year, and a very limited inventory of component parts, most of which have been coming from subcontractors and suppliers — makes it highly unlikely that InVision would be able to deliver even a fraction of the volume of machines needed to meet the bill’s requirement that all luggage on commercial aircraft be screened for explosives by the end of next year.
DOES THE TECHNOLOGY WORK?
What’s more, there is the unsettling question of whether InVision’s luggage screening technology, which basically boils down to CAT-scanners for suitcases, can reliably detect explosives in luggage. In 1998 the FAA pronounced the company’s machines “virtually foolproof.” But a test of the equipment at San Francisco International Airport by United Airlines found that the devices set off false alarms 30 percent of the time, and actually mistook sneakers and sausages for explosives.
Problems with the equipment persisted as recently as last November. In a test conducted by the New York Port Authority at JFK International Airport, pieces of luggage laden with C-4 explosives had to be run through the InVision scanners four times before they actually set off any alarms.
In a sense, that really doesn’t matter, since automated scanning of luggage is actually not much more than a cosmetic undertaking — like the use of National Guard troops at the airport — to reassure airline passengers that it is safe to get back in airplanes. No U.S. airliner has been bombed by cargo-hold explosives since the downing of Pan Am 103 nearly 13 years ago — and that’s certainly not because of the FAA’s scanner acquisition program with InVision.
In Congressional hearings on airport security last month, Florida Congressman John Mica of Florida called the entire FAA effort “badly bungled” and disclosed that 23 of its scanners have never been deployed at airports at all, and that the rest are actually used only a fraction of the time. Result? Less than 10 percent of the nation’s check-in luggage is actually ever scanned at all.
Many experts say that the only even-close-to-foolproof method for keeping explosives out of airline cargo bays would be the visual inspection of all luggage, plus the use of bomb-sniffing dogs. And even that approach could be defeated by a really determined terrorist.
But considering the current “do something…anything!” mood of the public regarding airline security, automated scanners are at least something. So it seems highly unlikely that the administration will let InVision Technologies mire the whole initiative in production bottlenecks before the White House forces the FAA to permit larger and better-capitalized electronics manufacturers to compete for the business. Considering the FAA’s historical approach to the whole matter, the goal will not be to get a truly foolproof system in place so much as to adopt a system that the public thinks is foolproof and that the airlines can live with.
INADEQUATE RESOURCES
That, in turn raises some obvious questions as to whether InVision’s current price of nearly $20 per share, or 122 times annualized current earnings, makes much sense. To gear up for volume production of its scanners, the company will have to greatly increase capital spending in almost no time at all, and with wholly inadequate financial resources at hand for the job. The company’s balance sheet is strong, but only in the bantam-weight class, with barely $9 million of cash, and tangible book value of less than $47 million. Then, by the time the business is finally ramped up and ready to go, the company could find that the FAA is parceling out the business to others as well, undermining the market value of its stock, even as the rush to bulk up for wartime production may have pushed operations deeply into the red.
Finally, there is the question, from a stock market perspective, of whether InVision has soared as much as it has because of its potential as a business, or simply because short-sellers got caught off base on a couple of recent occasions when the stock sold off modestly, then bounced back with a vengeance that may have been caused by nothing other than margin calls (mid-October and again only two weeks ago). In September, short-interest in InVision stood at 7,900 shares; by October it had exploded to 2.15 million shares.
These are all familiar perils for investors who dabble in obscure and thinly traded stocks like InVision Technologies — or at least, let us say, they should be familiar. During the latter half of the 1990s, trillions of dollars were poured into stocks on the basis of limited (or no) research at all, but simply because they were going up… which investors took to mean it would be smart to buy them before they went even higher. But they didn’t go higher; when every last fool had bought every last share, the stocks couldn’t go higher for the simple reason that there was no one left to sell to, and one after the next, they crashed.
Is that the fate that awaits investors in InVision Technologies? No one knows what the future holds, but this is one stock with a zero-to-hero run-up that certainly looks familiar. On Wall Street, it seems, old habits don’t just die hard — sometimes they simply don’t die at all.
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