Security Stocks Post Double-Digit Gain in 2006

The Dilemma of Investing in Security Product Companies

Obviously, when you look at the security products market, you have to take into account that the largest products companies (Tyco, Honeywell, GE, ASSA ABLOY, etc.) are multi-industry operations that provide little or no way to invest purely for their security exposure. In other words, no matter how much we admire and respect the management and growth prospects of HID, we are not going to invest in ASSA ABLOY as its proxy.

For the record, while HID itself had an excellent year — organic revenue growth was up 11 percent during the first nine months of 2006 with 33 percent total growth — ASSA ABLOY’s stock on the Stockholm Exchange mimicked those averages (up 12 percent).

As for Tyco, interested investors will have to wait for the company’s impending split-up to sink money into its security business. Its plan to spin off its other businesses from the Fire & Security division (as part of an overall corporate restructuring) in 2007 may allow the standalone business to begin looking again at selected, lock-on, high-quality acquisitions, both in the commercial and the residential space.

For this industry to gain traction, Tyco’s Fire & Security division (roughly 25 percent-30 percent of the company’s EBITDA) must begin to grow again, and in a way that creates value for investors.

Tyco’s Fire & Security business (principally under the ADT, Simplex-Grinnell, Sensormatic, Software House and American Dynamics brands) is currently facing growth challenges in its European arena (a long-term problem), and its commercial business faces a slew of newer, smaller competitors in video, access and alarm monitoring (many headed by ex-ADT personnel) that use systems integrators to try to install best-of-breed security systems.

Digital and IP Video Equipment Manufacturers Excel in 2006

Overall in 2006, digital video companies in particular had a strong year in both results and stock prices.

Denver-based Verint continues to show strong results, with a 22-percent increase in revenues during the first nine months of 2006. However, Verint’s stock price was up only slightly in 2006, due to stock options troubles facing its 57-percent owner, Comverse Technology, which the market is beginning to realize should not affect Verint itself.

FLIR, based in Goleta, Calif., is the leader in infrared video imaging and thermography (heat analysis). A check of Thompson Analytics’ “First Call” consensus analyst estimates should show a 12-percent increase in 2006 in both revenues and earnings (against an extremely good first half in 2005).

The company saw its stock price climb 30 percent as investors warmed to its diversification into commercial and security applications (including a joint venture with Pelco), and the company rebounded from earnings disappointments in late 2005. Consensus estimates for 2007 are for an improvement between 15-percent and 16-percent growth in revenues and earnings, as margins in the growing commercial and security division improve.

International stock performance superstars in 2006 included Axis Communications (U.S. headquarters in Chelmsford, Mass.) on the Stockholm Exchange (50-percent gain), in line with the growth of its world-leading IP digital camera business, and China Security & Surveillance (225-percent rise), which is just emerging on U.S. investors’ radar screens as the only Chinese CCTV company (based in Shenzhen) with a publicly traded stock in the United States.

 

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