Security Stocks Swept Up in Wall Street’s 2002 Free-fall

With the country caught up in fear of terrorists and anxiety over impending war, many security stocks bucked the declining trend of the stock market and registered solid gains in 2002. But it wasn’t easy as market indicators registered a third straight year of losses, sending investors running for the hills.

For the year, the Dow Jones dropped 16.8 percent, the S&P 500 23.4 percent and the NASDAQ composite plunged 31.5 percent.

Despite the stock appreciation realized by some security stocks, many saw the astronomical gains for the explosives detection and biometric companies drop sharply from the highs reached shortly after the terrorist attacks of Sept. 11, 2001.

In 2002, a number of small, micro-cap security product manufacturing companies dominated the top 10 security stock gainers. Five of the 10 were triple-digit winners – no small achievement in a grim market driven down by minimal profits, a weak economy, a declining dollar and a slew of giant bankruptcies and disclosures of corporate malfeasance.

Manufacturers Make Up Half of the Top 10

The top security stock in 2002 was the Arizona-based Rural/Metro Corp. (NASDAQ/RURL), a provider of emergency ambulance and fire protection services. Its stock soared 453 percent for the year.

Security product manufacturers dominating the 2002 list included Universal Security (OTC BB/USEC.OB), up 183 percent; EFJ Inc. (OTC BB/EFJI.OB), up 140 percent; NAPCO Security Systems (NASDAQ/NSSC), up 67 percent; Frisco Bay (NASDAQ/FBAY), which provides security products to banks and other financial institutions in addition to its ATM and security systems installation services, up 65 percent; and International Electronics (NASDAQ/IEIB), up 60 percent.

Other big security stock gainers in the Year of the Micro Caps came from a variety of security sectors.

Stock of the New York-based guard company Command Security (OTC BB/CMMD.OB) was up 134 percent for the year, despite losing its airport passenger-screening business through federalization in November.

A company from the private corrections sector, American Service Group (NASDAQ/ASGR), which provides medical services to more than 250 correctional facilities and military installations throughout the United States, registered a sharp increase of 122 percent in its stock value for the year.

Firearms Training (OTC BB/FATS.OB), which uses interactive simulation systems to provide training for small arms for the law enforcement and military markets, scored a 61-percent stock gain for the year.

Rounding out the top 10 was Global Payment Technologies (NASDAQ/GPTX), a company that designs, manufactures and markets paper currency validators and related paper currency stackers, which rose by 54 percent for the year.

Missing from the winners’ circle for 2002 were high-profile security firms such as Invision Technologies (NASDAQ/INVN) and Viisage Technologies (NASDAQ/VISG), both of which registered whopping stock gains in excess of 1,000 percent in 2001.

Some of the larger-cap security companies failed to ignite the interest of the investing public last year – but that crop has been diminishing since the acquisitions of giants such as Pinkerton, Burns Int’l and Wackenhut Corp.

The 800-pound gorilla of security, Tyco Int’l (NYSE/TYC) – which has approximately $10 billion in security sales through ADT, Sensormatic, Simplex/Grinnell and other subsidiaries – fought for survival after its CEO was indicted and a host of other controversies and issues (including accounting) ensued. As a result, its stock was crushed, plunging 71 percent from $59 to $17.08. More than $80 billion in market cap disappeared in the process.

Other major electronic security powers that weathered tough years in 2002 included General Electric and Honeywell. GE’s stock, which began the year at $40.08 per share, finished the 12-month period trading at $24.35 for a 39-percent drop. Honeywell ended the period at $24 per share, a 29-percent dip from opening at $33.86.

Culled from a list of 153 stocks on the Mallon Global Security Stock Table, 2002’s top 10 winners consisted of seven NASDAQ-listed firms, two trading Over the Counter (OTC) on the Bulletin Board (BB) and one plain old OTC. Four of the top finishers started the year selling at less than $1 a share. Let’s take a closer look.

1. Rural Metro

Rural Metro, the 9-1-1 emergency ambulance responder and provider of fire protection services, was on life support itself a couple of years back. Its debt and accounts receivable ballooned; it went into a negative working capital and negative net worth position and reported huge losses.

It is still not out of the woods as its shareholder equity remains in the red with its debt hovering around $308 million. For the three months ended Sept. 30, 2002, revenues for the Scottsdale, Arizona-based firm, which services approximately 400 communities in 26 states and the District of Columbia, rose 8 percent to $125.6 million from $116.5 million in the first quarter of 2001. Net income from continuing operations and before accounting change totaled $3.8 million, or 21 cents per share, vs. a loss of $990,000.

Even with its astronomical stock gains in 2002, Rural Metro’s market cap is only $34 million. It is trading at a lowly price/sales (P/S) multiple of 7, and a price/earnings (P/E) ratio of 4. Although off the critical list for now, the prognosis for Rural Metro is still guarded.

2. Universal Security

Universal Security, based in Owings Mills, Md., has been around for quite some time – having gone public in 1973. In 2000, it decided to dump its telecommunications and video products and concentrate on made-to-order, private-label sales with an enhanced line of smoke alarms. The strategy apparently paid off. Most of the company’s products are designed for easy installation by the consumer.

For the six months ended Sept. 30, 2002, sales increased 60 percent to $7.8 million from $4.9 million in the prior year’s comparable period. Net income was up from $86,000, or 9 cents a share, to $1.2 million, or $1.17 a share.

3. EFJ Inc.

EFJ Inc., formerly known as Transcrypt Int’l, manufactures wireless communications products and information security products. It is based in Lincoln, Neb. Its Transcrypt Secure Technologies division manufactures equipment designed to prevent unauthorized access to sensitive voice communications.

For the nine months ended Sept. 30, 2002, the company earned $784,000 vs. a loss of $994,000 in the comparable period of 2001. During the same period, its sales dipped 3 percent to $28.5 million.

4. Command Security

Command Security shrugged off the loss of its high-profile passenger screening business through federalization late last year, and surged ahead with increased sales and earnings.

For the six months ended Sept. 30, 2002, the guard company – which has 19 operating offices in New York, Massachusetts, New Jersey, Illinois, California, Pennsylvania, Connecticut and Florida – earned net income totaling $2.9 million compared to a loss of $429,000 for the comparable period of 2001. For the same period, sales shot up 49 percent to $55.7 million.

5. American Service Group

American Service Group, health-care specialists for the corrections industry, had a dramatic turnaround during the first nine months ended Sept. 30, 2002. It earned $9.6 million vs. a significant loss of $17.2 million for the 2001 period when it took a big write-off of assets. Its sales slipped 1 percent to $417.7 million.

The Brentwood, Tenn.-based company announced in October that it closed a $60 million credit line with CapitalSource Finance LLC and used an initial advance to retire all outstanding indebtedness with its then existing credit facility. The new line is expected to save the company approximately $250,000 annually in interest.

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