Despite improved security efforts, terrorism remains a constant
and serious risk. Among the competitors vying for growing
counter-terrorism expenditures, one company stands out for its
and innovative technology: Smiths Group (LONDON: [[SMIN]], PINK:
Smiths Group, a London-based manufacturing conglomerate,
specializes in the advanced body scanners that are increasingly
coveted by airports and other security-conscious organizations
around the world.
The company's Smiths Detection division makes body scanners and
equipment for the detection of weapons, explosives, chemical
agents, biohazards, narcotics, and contraband. Smiths Detection
represents roughly 19 percent of Group sales.
Threats to the flying public remain in the forefront of
terrorism concerns. Frost & Sullivan reports that total global
expenditures on airport security in 2011 reached $19.1 billion and
will exceed $45.4 billion by 2018.
According to the Homeland Security Research Corp, the global
market for body scanners alone will grow from $1.2 billion in 2011
to $1.9 billion by 2016. Demand for scanners will be especially
acute in terror-troubled areas such as the Middle East and India,
as well as China's rapidly expanding civil aviation sector.
Smiths Detection commands about one-third of the scanner market,
making it the world leader. In addition to airports, the company
also supplies scanners to hospitals, prisons and militaries around
Smiths Detection is the leading maker of millimeter-wave, or
"full body" scanners, which are increasingly seen by security
officials as the most effective way to prevent terrorist
infiltration at key checkpoints.
These 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.
A Boost from TSA
In May, the U.S. Transportation Security Administration (TSA)
announced that it would accelerate full-body screening for as many
as three in four air passengers, to mitigate criticism the agency
has received for patdowns of children, seniors and members of
Congress. The TSA is part of the US Department of Homeland Security
The TSA envisions expanding enrollment in its PreCheck
expedited-screening program beyond frequent flyers selected by
airlines. The agency plans to require that 75 percent of the flying
public use PreCheck, with the rest going through traditional, more
intensive screening lanes.
DHS' budget for 2012 is $57 billion, a 3 percent increase over
2011, with $215 million earmarked for more body scanners in
airports around the country.
The Obama administration has proposed deploying as many as 1,275
full body scanners in US airports. By the end of 2012, the DHS
expects to add 275 scanners to the 500 already installed and
operated by the TSA at 78 airports nationwide. As the clear leader
in this product niche, Smiths Group is poised to reap the lion's
share of these initiatives.
For the six months ended January 2012, Smiths Group reported
revenue of GBP1.4 billion, a 3 percent increase over the same
period last year. Earnings fell 41 percent to GBP111 million, but
sales in emerging markets and the Middle East grew from about 12
percent to 15 percent of Group sales. Smiths Detection's sales
during the period dropped 11 percent to GBP220 million, largely a
reflection of temporary order delays.
The stock has taken a hit lately because of the company's
disappointing performance, but the earnings dip was largely due to
one-time charges. Investors are missing the fact that Smiths
Detection is gearing up to launch a record number of new security
products over the next 18 months.
Notably, Smiths Detection recently unveiled a next-generation
explosives scanner for baggage that uses 3D technology to detect
not just metals but also ceramics, plastics and liquids. The
company also launched an advanced mobile radiation detector this
year that has already received a $4.5 million order from the US
In March, Smiths Detection won a contract worth more than $125
million to supply all the main security scanning systems at the New
Doha International Airport in Qatar, the company's biggest contract
win to date and a foothold in the growing Middle Eastern market.
Also in March, Smiths Detection won a $20 million contract to
supply India's customs authorities with scanners.
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 up to 4 percent a year, based on a five-year
Despite these strong trends in its favor, Smiths sports a
reasonable price-to-earnings ratio (P/E) of 15.6. California-based
OSI Systems (NSDQ: [[OSIS]]), parent company of Smiths' direct
competitor Rapsican, has a P/E of 27.
Smiths other major competitor in the scanner market is L-3
Communications Holdings (NYSE: [[LLL]]). Although the company has a
lower P/E of 8.6, it's a broad-based defense contractor that lacks
Smiths' market presence and 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.
Smiths Group's American depositary receipt (ADR) is a buy
up to GBP1,200.
I have no positions in any stocks mentioned, and no plans to
initiate any positions within the next 72 hours. I wrote this
article myself, and it expresses my own opinions. I am not
receiving compensation for it (other than from Seeking Alpha). I
have no business relationship with any company whose stock is
mentioned in this article.
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