SSI logo

Security Investor Bulls Trample the Bears

Publicly traded security companies continued positive performance for the second straight year, even outperforming major U.S. market indexes. Robust M&A activity spurred growth and consolidation in 2010, with more of the same projected in the coming year.




Riding a wave of momentum from the previous year, security sector stocks continued to perform well throughout 2010. Although the security industry learned it wasn’t immune to the global recessionary tumult, security subsector indices rose on average 14 percent year over year. That was good enough to beat out the Dow Jones Industrial Average (+9 percent) and S&P 500 (+11 percent), while matching NASDAQ’s 14-percent gain.

When segregated by size of equity capitalization — large cap, mid cap, small cap and micro cap — security sector stocks delivered returns consistent with the aggregate overall performance except for micro caps. Here, the Russell 3000 benchmark soundly beat the respective security index by more than 11 percent.

Small caps showed the highest year-over-year price appreciation by gaining 22 percent versus large caps at 15 percent, followed by mid caps at 11 percent and micro caps at 1 percent.

This past year the security industry also experienced a good deal of M&A activity with a number of significant deals acting as catalysts for consolidation, reshaping industry subsectors and redefining competition.

SECURITY SALES & INTEGRATION’s annual industry financial analysis and stocks report examines the financial performance of the security industry. It offers perspective on what industry professionals may generally expect to see in the marketplace during  2011.

Industry Segments Up Close
New for this year’s report are revised subsector peer groupings to keep pace with the changing landscape of the industry. The “Security Sector Performance Overview” on page 35 provides a brief look at the individual industry sectors, plus details about how some industry players fared during 2010. Notably, the Security and Defense Integrator subsector turned in the weakest performance, on average losing 7 percent of equity value.

The winners in rank order were Alarm Equipment and Physical Access (+37 percent); Asset Tracking and Intelligent Traffic (+32 percent); Large Cap and Defense Primes (+16 percent); Safety and Protection (+13 percent); Corrections and Guarding (+9 percent); C3ISR [Command, Control, Communication, Intelligence, Surveillance and Reconnaissance] and Threat Detection (+7 percent); and Credentialing and ID Solutions (+5 percent).

Aggregate subsector equity values yielded modest variations in subsector performance, but generally tracked the index measures. Sector equity value increases were driven by aggregate sector 5-percent year-over-year revenues gains, while respective profits (as measured by earnings before interest, depreciation, amortization and taxes or EBITDA) rose a collective 4 percent.

Also contributing to the rising values, were increases in multiples, up approximately an average of 10 percent for revenue and 6 percent for EBITDA.

Sector stock prices closed the year with aggregate industry stocks trading at approximately 85 percent of component companies’ 52-week highs versus 2009’s approximately 80-percent finish.

The C3ISR/Threat Detection subsector closed highest at approximately 90 percent and the Alarm Equipment/Physical Access subsector finished lowest at approximately 80 percent of their respective subsector 52-week high price marks.

In measuring the volatility of those subsector prices, Alarm Equipment/Physical Access and Asset Tracking/Intelligent Traffic experienced the greatest volatility (as measured by deviations in the percent of 52-week high at the year-end close).

Corrections/Guarding and C3ISR/Threat Detection experienced the lowest volatility. These results were somewhat predictable given that 80 percent of the Alarm Equipment/Physical Access companies, and 83 percent of Asset Tracking/Intelligent Traffic companies, were micro- and small-cap businesses. Small- and micro-cap stocks tend to have greater price volatility than their larger peers. Additionally, leverage factors contributed to equity value gains, as many subsectors and companies continued to pare debt levels.

Reviewing 2010 M&A Activity
As in recent years, mergers and acquisitions continued to be a key form of liquidity for owners seeking to convert assets into cash. In 2010, numerous key transactions were consummated, some big and some not. Stanley continued its march to consolidate security products and services with three service company acquisitions as well as the Black & Decker merger.

The markets reacted favorably to Kratos Defense & Security Solutions’ acquisition of Henry Bros. Electronics (HBE) and other buys in the integrator and security services/products markets, despite increasing its debt outstanding by 275 percent. In contrast, the market seemingly did not support FLIR’s $225 million acquisition of ICx, perhaps due to the lack of a cohesive product strategy and mix qualities at ICx. Defense company Moog, continued its string of small video asset acquisitions, further migrating into the world of security.

Page 1 of 3 pages 1 2 3 >


Article Topics
Business Management · Acquisitions · Cover Story · Mergers · All Topics
Acquisitions, Cover Story, Mergers


PSA Cybersecurity Congress
Latest Download
How to transition your business to an as-a-service model, and why it's beneficial…
Sammy Awards
Trending


SPONSORED LINKS


Don't miss out! Subscribe to Security Sales & Integration magazine today. - Security Sales & Integration

EDITOR'S CHOICE