Lock 'n
Load
By Neil George and Elliott Gue
Personal Finance
The quest for national security is thrusting behind-the-scenes companies onto the front lines.
Black
Tuesday has the government focused on improving security and
getting the bad guys where they live. The market isn't far behind,
as headline defense contractors have been bought across the board.
While these companies
remain attractive, including High-Stakes pick Raytheon, it's
the smaller companies that are the best buys.
The new scale of threats
means that specific products and services will be required to
secure the nation. Defense now includes identifying new threats
to civilian and military facilities and people through advanced
technologies. And once threats are identified at their source,
the military will continue to require flexible means of attacking
selected targets in a multitude of conditions.
Saddle Up
The
U.S. military doesn't go anywhere without something made by Engineered
Support Systems (Nasdaq EASI). The company builds everything
from transportable living facilities to surveillance gear that
can support everything from a platoon to a brigade.
The company's products
will be very important as threats expand to include biological
weapons or even small nuclear devices. One of its product lines
is encapsulated shelters and filtering devices.
Engineered Support's
stock has been rising during the past several quarters but it's
still trading at a fraction above its trailing sales, which were
expanding even before the recent tragedy by nearly 120 percent.
It also makes the current and prospective sales count for investors
as it continues to provide a return on equity exceeding 18 percent.
New contracts continue
to pile on top of an already impressive order book, making Engineered
Support a solid buy up to 61; but with the enormous volatility
in the sector, consider any purchase under 50 a steal.
Once the military
has a target, products from Alliant Techsystems (NYSE
ATK) will be called on to do the rest. The company specializes
in contracts for smart munitions as well as specialized ammunition
to deal with varied environments and targets.
In addition, its propulsion
systems are important components of tactical and strategic missile
products. The company, while not a household name, is one of
the oldest U.S. contractors, a spin-off from Honeywell
a decade ago.
With many locations
emerging as isolated targets in either rural or urban environments,
smart weapons will be among the primary means of eliminating
various enemies of the nation. And the company isn't just selling
domestically.
Foreign
sales, particularly to European NATO members, are picking up
steam with several new contracts recently announced. Like other
behind-the-scenes companies, Alliant trades at a small premium
to its trailing sales while boasting improving double-digit operating
margins.
The company should
continue to astound investors with returns on equity exceeding
43 percent. Alliant's strong performance is a lock and the
stock is a buy up to 100.
Finding The Bad Guys
Security
is tough on commerce. Witness the fallout after the recent attacks;
trucking traffic across U.S. borders slowed to a crawl, especially
along our border with Mexico. That's a massive interruption for
the U.S. economy Mexico and Canada are our largest export markets
and Mexico is a crucial source of cheap manufactured goods.
The key to this dilemma
is faster scanning equipment that doesn't interrupt the flow
of traffic while identifying the potential bad guys. That's put
American Science & Engineering (NYSE ASE) in the catbird's
seat.
ASE manufactures a
range of x-ray scanning devices designed to scan trucks, boats
and people in a fast, efficient manner. ASE's CargoSearch lines
of truck scanning equipment are already extensively used along
the Mexican border to scan trucks for everything from illegal
aliens to plastic explosives and narcotics. And the company's
BodySearch technology is already in use at several major U.S.
airports as an alternative to strip-searches.
The U.S. hasn't been
ASE's only customer Britain just signed a contract for ASE to
supply security equipment to its major ports. The company's new
offices in Hong Kong and Mexico should power foreign growth.
ASE saw a big boost in recent trading but it's still a buy
under 15.
Increased terrorist
activities worldwide mean that higher spending on airport scanning
and security technologies is a reality. And no country is truly
immune to the terrorist threat look for smaller airports in tourism-heavy
locations worldwide to spend big on upgrading security in the
coming years.
Invision Technologies
(Nasdaq INVN) was the first to meet FAA guidelines for explosives
scanning equipment and it's still the market leader. The company's
core CT (computed topography) technology is used to scan checked
luggage for explosives and dangerous materials. In March 2000,
the FAA awarded the company a three-year, $57 million contract
for its CT-based scanning technology.
But the company, facing
more competition, isn't relying solely on airport scanning equipment
for revenues. Invision was recently awarded a near $12 million
contract to supply backpack-based mine scanning equipment to
the Navy. With the Afghanistan-Pakistan border littered with
landmines, look for demand for this technology to skyrocket.
Buy Invision under 12."
|
LOCK AND LOAD |
||||
| Company
Name (Exchange: Symbol) |
Recent Price | Price/ Book | Price/Sales | Return on Equity |
| Eng.
Support Sys. (Nasdaq EASI) |
$51.25 | 5.0 | 1.3 | 18.4% |
| Am.
Science & Eng. (NYSE ASE) |
14.10 | 3.1 | 1.0 | 3.0 |
| Invision
Tech. (Nasdaq INVN) 10 |
.75 | 3.0 | 1.9 | 1.6 |
| Alliant Tech. (NYSE ATK) | 85.60 | 9.0 | 1.5 | 41.7 |
Editor's Note: Neil George is contributing editor of Personal Finance. 1750 Old Meadow Road, Suite 301, McLean, VA 22102. 1 year, 24 issues, $69, and editor of Market Meridians; Elliott Gue is an analyst at Personal Finance and an associate editor of Market Meridians.
