Are the world’s airports safer since September 11, 2001? This overriding question now dominates public discourse. In the wake of the terrorist attacks on that fateful day, billions have been spent to beef up airport security.
The foiled terrorist attack last Christmas Day on a Northwest Airlines flight bound for Detroit put a spotlight on airport screening technology, creating a bonanza for aviation companies with leading-edge security solutions.
Among the competitors vying for a slice of the growing airport security pie, one entrepreneurial company stands out for its investment fundamentals and innovative technology: Smiths Group (LSE: SMIN).
Smiths is a British-based company involved in specialty engineering activities, especially in aviation security. Based in London, it’s listed on the London Stock Exchange and is a component of the FTSE 100 Index.
Smiths is the world’s biggest manufacturer and seller of scanners to detect weapons and explosives on airline passengers. Significantly, the company specializes in the millimeter-wave, or “full body” scanners now coveted by airport security officials and under trial use in British airports.
Smiths is considered the leader in millimeter-wave full body scanners, which are increasingly seen by security officials as a “silver bullet” to address airport security concerns. Smiths’ 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.
Smiths experienced a boost in contracts for aviation security since the “underwear bomber” attack on Christmas Day, when a Nigerian male onboard an airplane tried to ignite explosives hidden in his crotch. In the wake of this highly publicized incident, the United States, Britain and the Netherlands forged ahead with aggressive plans for greater deployment of full-body scanners. The United States alone plans to spend $529.3 million in the fiscal year beginning Oct. 1 to acquire 500 of the scanners and hire 5,355 people to operate them.
One consulting firm estimates that the worldwide body scanner market is on track to exceed $1.6 billion in sales during the next five years, or $320 million per year, with Smiths potentially taking a share of about one-third, an amount equal to more than 10% of today’s body scanner sales base.
Smiths Detection division, which makes body scanners, represents 19% of group sales.The company also makes a broad range of other security equipment and medical devices.
For the six months ended January 2010, Smiths Detection’s sales, operating profit and margin increased by +11.0%, +56.0%, and +14.5%, respectively. 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 +3 to +4% per year, based on a five-year roll out.
Despite these strong trends in its favor, Smiths sports a reasonable price-to-earnings ratio (P/E) of 15.9, which looks especially attractive compared with the S&P’s average P/E of 21.7. California-based OSI Systems (Nasdaq: OSIS), parent company of Smiths’ direct competitor Rapsican, has a P/E of 26.98. Smiths other major competitor in the scanner market is L-3 Communications Holdings (NYSE: LLL), with a lower P/E of 12.7; however, L-3 is a broad-based defense contractor and an indirect play on airport security, with less growth opportunity in this niche than Smiths. The rest of the scanner field is made up of a multitude of smaller players with less market presence and lobbying clout - not to mention less advanced technology.
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