Investors Find Safety In Security Stocks

While most U.S. stock indexes finished 2007 with gains for the year, there was particular cause to be positive about continued investment opportunities in the shares of security industry leaders.

Ongoing weakness in the housing market, concerns about subprime mortgages and crude oil prices that approached $100 per barrel all undermined overall investor confidence in the fourth quarter of 2007. This year, similar sentiments could likely affect the overall market, including some sectors of the security industry. That said, security services and equipment stocks again outperformed the market — a trend that has continued each year except one during the past six years.

Positive gains similar to last year’s can again, in part, be attributed to investors’ conviction that homeland security and the war against terrorism will sustain industry growth. Investor expectations also project continued growth and acceptance of commercial technology and services around the corporate network.

Other signs of industry optimism include strong acquisition activity in security technology, and the traditional alarm security area has perked up with spin-off activity by Securitas and Tyco Int’l.

The financial and investment health of the electronic security industry is detailed here in Security Sales & Integration’s annual stocks report, a valuable resource to everyone with a vested interest in the overall market environment.

Video Surveillance, Private Prison Operators Lead Market Growth

Lehman Brothers, the New York-based global finance leader, maintains an index of security industry stocks that has appreciated 143 percent since Aug. 31, 2001, compared to a 109-percent rise in the S&P 500 during the same period. During the course of 2007, Lehman’s Security Index rose 13 percent, compared with 3.5 percent for the S&P 500.

An overview of the stock index can be seen on page 32. Note that Lehman Brothers attempts to limit the index to companies with significant percentage exposure to security (about 25-percent minimum, so Stanley Works wasn’t included in 2007 but will be in 2008 with its acquisition of HSM Electronic Protection Services).

Among several sectors whose performance led security stocks in 2007:

Video surveillance, +39 percent — In 2007 this sector proved to be the hottest group in security. The U.S. government and corporations are discovering the use of networked video, infrared video and video analytics for everything from perimeter security to securing maritime night vision, to limiting check fraud.

Among the leaders in this space: FLIR (+97 percent), based in Goleta, Calif., a provider of infrared video imaging and thermography (heat analysis); China Security & Surveillance Technology Inc. (+80 percent), the leading surveillance company in China; and Axis Communications AB (+73 percent), a provider of network video cameras with U.S. headquarters in Chelmsford, Mass.

Private prisons, +34 percent — Dramatic increases in demand from homeland security rules are forcing states and federal government agencies to outsource increasing business to companies like Nashville, Tenn.-based Corrections Corp. of America (+29 percent) and The Geo Group (+49 percent) of Boca Raton, Fla. There is a striking demand-supply imbalance for prison beds in public prisons in the U.S. at both the state and federal level.

Two other standout segments in Lehman’s 2007 index were sensor companies (+31 percent) and armoring and lethal/nonlethal force protections (+30 percent), which were helped by the acquisition of Armor Holdings by British defense contractor BAE Systems. 

Economic Woes Weigh Heavily; Brink’s Stock Experiences Volatility

Two sectors in particular proved to be true laggards in 2007. While the struggling U.S. economy had a ball and chain effect on some companies, others were adversely influenced by market machinations.

Background screening and data analytics, -21 percent — Companies in this sector are sensitive to the amount of employees being screened and to factors in other vertical markets, such as the number of mortgage applicants being vetted. As concerns mounted over the U.S. economy in 2007, companies like Alpharetta, Ga.-based ChoicePoint (-12 percent), St. Petersburg, Fla.-based First Advantage Corp. (-30 percent) and Minneapolis-based Fair Isaac Corp. (-21 percent) performed below expectations. 

Physical security (guarding, armored transport, et al.), -4 percent — With the exception of Britain’s Group 4 Securicor (+24 percent), which appeared quite aggressive in going after business in 2007, other companies in this sector did not fair as well, including Stockholm-based Securitas (-15 percent), which spun off its installation and monitoring businesses, and Spanish security firm Prosegur (-1 percent), which had already risen in 2006 on takeover speculation.

Montreal-based Garda World Security Corp. (-30 percent), the second largest physical security company in North America after The Brink’s Co., enjoyed spectacular growth through acquisition in 2006 only to drop precipitously in 2007. The company was hit by concerns related to the torrid pace of its acquisition program and inevitable financial rumoring typical in the wake of such growth. Brink’s Home Security (a division of The Brink’s Co.), which Lehman Brothers arbitrarily includes in physical security since it could just as easily be placed in monitoring, fell 7 percent in 2007. The performance hurt the group, but special circumstances at the beginning of 2007 justify explanation.

The positive reaction to the sale of BAX Global, the repurchase of 10 million shares, and the subsequent shareholder activism to split up the company, in part, caused Brink’s stock to fluctuate 15 percent up or down during the year, simply depending on the timing of corporate and shareholder-related announcements. Fundamentally, the company operated at or ahead of analyst estimates for most of the year.

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