Security Stocks Post a Positive Year for Investors, Again

Security Sales & Integration’s annual industry financial analysis examines some of the trends that impacted the performance of various security sectors in 2014.

The U.S. stock market posted another solid year in 2014. Standard & Poor’s 500-stock index finished the year with an 11.4% increase, its sixth straight year of gains. The Dow Jones Indus-trial Average ended 2014 up 7.5%, though it lagged behind the S&P 500 and NASDAQ. The NASDAQ rose 13.4% in 2014.

For public investors and others with a penchant for the electronic security market, you’ll be happy to know the industry’s manufacturers, systems integrators, alarm monitoring companies and related firms fared reasonably well in 2014 for the most part. And comparative to the aforementioned market indexes, the industry did quite well.

According to Imperial Capital, 2014 marked the sixth year in a row that the public companies listed in its Physical and ID Security Index outperformed the S&P 500. As of Dec. 31, the group of 45 companies on the index had bested the S&P 500 by 18% and the DJIA by 32%.

Of course that rosy picture belies some of the ongoing challenges and emerging pain points in the marketplace. For instance, a shakeout of installing security contractors that have not attained networking skillsets is mounting, while some manufacturers struggle to maintain profit margins in an era of cheaper equipment from Asian providers.

Based on in-depth interviews with Imperial Capital Managing Director Jeff Kessler, one of the industry’s foremost experts, Security Sales & Integration‘s annual industry financial analysis examines just some of the trends that impacted the performance of various security sectors in 2014. Plus, a sidebar summarizes the year for the custom electronics segment.

Electronic Locks for All Market Niches

In 2014, providers of locking and identity systems generally found the security landscape to be less chaotic and more receptive than in recent time. The year was led, interestingly enough, by stocks that performed strongly at opposite ends of the technology spectrum.

ASSA ABLOY (OM: ASSA B) saw demand recover from previous quarters, mainly in the United States, but recently also in its biggest market, Europe, where the debt crisis weighed on demand for years. ASSA ABLOY’s stock has been on a growth spurt for almost three years. Part of that is due to scarcity value in Europe for companies that are exceeding expectations.

Several factors at the commercial/industrial enterprise level, among other larger verticals, are driving demand – not least of which is an uptick in capital expenditures. But the locking sector’s more rosy performance in 2014 can also be attributed in part to the networked-based technology evolution hitting the residential space, as well as the commercial monitoring arena.

Clearly, these are not your father’s locks. There has been impressive growth in the amount of electronic interoperable locks that will eventually be commonplace on doors. These devices, for example, can be controlled from a central location in the wake of shootings at institutions and similar scenarios.

The number of companies that can design, manufacture and market electronic locks really well is small compared to the wider pool of lock companies. Among the firms solidifying a presence in the electronic and wireless lock market are privately held Salto Systems, Kaba (FRA: KABN), Stanley Black & Decker (NYSE: SWK) and others.

In terms of wireless digital lock manufacturers, analysts are bullish on the long-term prospects for companies such as Allegion (NYSE: ALLE), which is the second-largest provider of locks and access control systems in the world. The company is targeting 4%-5% top-line growth and 10%-12% bottom-line growth. Its U.S. sales, which accounted for 62% of FY14E revenues, appear to be picking up with increasing backlogs in institutional, education and health-care markets.

Previously moribund through the recessionary years, these verticals are now forecast to accelerate into 2016. As an example of how far locks have progressed, Allegion markets a Schlage-branded electronic device that can provide audit trails for cost-sensitive school systems to migrate from nonelectronic to electronic locking systems. Allegion’s “Engage” wireless technology provides an easy path to those small- to medium-size businesses (SMB) trying to find a cost-effective and uncomplicated way of moving to electronic locks, replacing a $300-$4,500 lock at significantly lower price points.

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About the Author

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Although Bosch’s name is quite familiar to those in the security industry, his previous experience has been in daily newspaper journalism. Prior to joining SECURITY SALES & INTEGRATION in 2006, he spent 15 years with the Los Angeles Times, where he performed a wide assortment of editorial responsibilities, including feature and metro department assignments as well as content producing for latimes.com. Bosch is a graduate of California State University, Fresno with a degree in Mass Communication & Journalism. In 2007, he successfully completed the National Burglar and Fire Alarm Association’s National Training School coursework to become a Certified Level I Alarm Technician.

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