Despite economic climate, forecast for security OK

No doubt about it, the innocence is gone. Since 9/11, airlines have tightened safeguards, barricades have gone up around government buildings and local agencies have taken on a slew of new security responsibilities.

"Americans have become more security conscious as our society has gotten more dangerous over time," said Edward Cunningham, head of investor relations for Brink's, the iconic armored- truck company.

As free societies try to strike a balance between protecting the public and personal privacy, many see private security firms as a way to fill the gaps and augment public services.

That heightened sense of danger has helped fuel growth among stocks in IBD's security services group. As of Friday, the sector ranked No. 21 among IBD's 197 industry groups, up from 101 six months ago.

1. Business

The security and safety sector encompasses a broad range of companies that make everything from alarms and gates to sensors and cameras.

Tyco International's ADT unit makes home-invasion alarms that protect more than 5 million households, making it the largest home-security firm.

Other firms manage private prisons and jails on behalf of government agencies. Corrections Corp. of America, Geo Group and Cornell Companies are the biggest firms in the group.

Public opinion about private prisons has changed since Damon Hininger got his start in 1992 as a guard for Corrections Corp. in Kansas. Three months ago, he was named the firm's president and chief operating officer.

Acceptance of private incarceration has "grown a lot" since 1992, Hininger says.

"I clearly remember folks back then worrying if our private facility would be accepted by the community," he said. "Now we're very well accepted and seen as a viable business solution."

After 25 years in business, CCA has grown to 65 facilities, ranging from 200 inmate beds to 3,000, in 21 states.

Other firms sell screening systems to protect against theft.

L-1 Identity Systems authenticates identities for clients. ID Systems tracks assets wirelessly. Checkpoint Systems provides security cameras to track products for retailers.

Many specialist firms address issues such as fire safety, ambulance services, or the detection of explosives and toxic chemicals. American Science & Engineering checks for weapons and drugs in cargo shipments and baggage.

Taser makes stun guns. LoJack sells systems to track stolen cars. Both companies have had strong growth in recent years, but that has begun to slow.

** Name Of The Game: Help customers feel safer. Businesses hire security firms to minimize risks and liabilities. Homeowners seek to protect their families and possessions.

2. Market

The security industry comprises tens of thousands of businesses beyond public law enforcement. More than 300 companies in the U.S. sell electronic security products. The security business units at nine giant conglomerates claim nearly half of this submarket. They are General Electric, United Technologies, Honeywell International, Siemens, Tyco, L-3 Communications, Diebold, Stanley Works and France-based Schneider Electric.

U.S. sales of electronic security systems totaled $9.7 billion last year, a 36% increase over the year before, according to the Security Industry Association. Supporting sectors, including systems integrators, added another $4.7 billion in 2007. SIA officials expect a "much lower" growth rate this year.

Electronic security sales are forecast to grow 7.8% per year, according to the Freedonia Group, a market research firm.

Analysts expect above-average growth for industrial sites, office buildings, lodging and the services sector.

Outside of the consumer market, governments and other institutions were the biggest buyers of electronic security last year. Industrial sales are expected to grow faster than other segments through 2012.

Broken down by product segments, the fastest growers will include access control, video surveillance, fire detection and intrusion detection, according to SIA Chief Executive Richard Chace.

"Security as a practice and commodity are value propositions, for the foreseeable future, that arch through U.S. government, corporate and industrial, institutional, commercial and residential markets," Chace said by e-mail.

In large part, the growth of electronic security is being driven by perceptions of a growing crime risk -- despite a long-term trend of falling crime rates, according to the Freedonia Group. Furthermore, many homeowners and businesses are taking charge of their own security in the belief that public safety crews are overburdened.

Technology improvements and lower costs should increase spending for upgrades to existing security systems. Those advances should also help increase market penetration with new sales.

The best prospects for growth will involve products and services that offer high levels of protection with minimal amounts of human support. Automated controls for building access can replace live guards, for instance.

Makers of biometric controls, which use fingerprints or iris scans to grant clearance, will grow exponentially over the next decade, according to the Freedonia Group. The biometric market alone should reach $4.6 billion in sales by 2017.

3. Climate

Sales of contraband-detection systems grew quickly in the five years after 9/11, but that trend has since cooled off. A major slowdown in home sales will likely crimp growth for home security systems as well.

To stay competitive with the huge multinationals, many pure-play security firms have bulked up through acquisitions. More mergers are likely.

L-1 Identity Systems formed when Viisage Technology and Identix merged in 2006. L-1 also bought Integrated Biometric Technology, SecuriMetrics and Iridian Technologies.

Geo Group of Florida formed in 2003 when Wackenhut Corrections merged with Group 4 Falck of Denmark.

Brink's will spin off its $500 million home-security division on Oct. 31.

The Brink's consumer unit is growing 10% per year in sales and subscribers. But the business is still largely misunderstood, Cunningham says.

"By being separated, a pure-play company should get better stock multiples and more focus from management and Wall Street," he said.

4. Technology

New biometric security systems have been a big help in thwarting the bad guys. These systems limit access by checking users' unique fingerprints, palms, eyes or even face. When implemented well, biometrics are virtually fail-safe.

Computer automation systems have also speeded the processing of new inmates and improved security records maintenance.

Brink's, which will turn 150 next year, continues to evolve. The company has developed a technology called CompuSafe to protect the cash collected by store managers and other merchants. Clients can use it to make bank deposits instantly to get same-day credit.

The system manages cash online, doing away with manual counting and recounting. It also can spot counterfeits, order change and reconcile bank deposits. In this way, stores make fewer mistakes, and managers can give more attention to customers and employees.

Brink's also insists on using heavy armor on all its trucks to protect the guards who make pickups and drop-offs, says Cunningham.

"One way to cut prices is to cut safety and security, but we're not going to do that," he said.

5. Outlook

Security risks are a growing concern in an uncertain world. Nine in 10 executives rate security as a CEO- or board-level matter.

Yet decentralized management and conflicted priorities can make it hard to maintain security, according to a recent survey of 175 large global companies conducted by Forrester Consulting and BearingPoint.

"It's clear that overly complex, dotted-line organizational structures and competing business priorities are hindering organizations' ability to effectively manage risk and security -- from planning and budget to execution," J.R. Reagan, a BearingPoint vice president, said in a statement.

** Upside: People naturally want to ensure safety for themselves, their families and their businesses. As such, this market should continue with steady annual growth in the single digits.

Companies might buy new security systems to help save money and reduce losses to theft.

And while it may sound crass, terrorist threats, crime waves and natural disasters should play well for this sector. After all, the market grows in relation to society's level of insecurity -- whether real or perceived.

** Risks: The current financial crisis will likely continue to hurt consumer confidence and stall economic growth.

Fewer new homes means fewer alarm systems purchases. Tightened business spending might cause many businesses to delay upgrades or new security measures.