Investors in the public markets have driven up the value of security stocks at a rate more than double the growth of the Standard & Poors Index, and more growth is ahead, according to Jeff Kessler, analyst at Lehmann Brothers.
Kessler's analysis packed the house at the financial conference held last week in New York, Securing New Ground.
"The fact is, security is still an attractive industry for the stock market to get into. We just have to find the right vehicles to get into," he said.
The Security Index from Nov. 7, 2003 to Nov. 4, 2005 outperformed the stock market overall, registering 42 percent growth compared to 17 percent for the Standard & Poor's (S&P) Index, according to Lehmann Bros.' Security Industry Annual 2005. Since the September 11 attacks in 2001, the index shows growth of 227 percent, versus 12 percent for the S&P.
The Lehmann Bros. report lists 43 companies in the Security Index, representing a wide range of sizes and specialties, from L3, Fair Isaac, and Diebold among service providers to Flir, OSI, Vicon and Napco among manufacturers.
Investors are particularly interested in Armor Holdings, Brinks, Choicepoint, Identix, and Symbol Technologies, according to the report.
Kessler outlined characteristics of a security company that stock market investors look for.
- Size: market capitalization of $200 million or more
- Growth rate: more than 5 percent per year
- Profitability: "positive net profit, or about to be."
- Cash flow: generating cash flow from operations to reinvest
- Valuation on metrics
What investors in the public markets want in 2006 is the opportunity to trade in an alarm company, a sensor company, a biometrics/authentication company, and a specialized video company, Kessler said. "These are the areas we want to move forward in."
Market Success Still Ahead
The heightened attention on security stocks has not been all positive of late, Kessler noted.
"In general, there is some market exhaustion with biometrics," he said. "The market has heard so much about biometrics in the last two years. We haven't seen the bottom line profits yet."
Kessler pointed to some resistance in the private sector to biometrics. Some corporate security directors "will never buy a biometric system until we can see it work the same way 100,000 times on the same wall." As a result, the government may by first to lead the breakthrough.
More mergers and acquisitions are expected in 2006.
"We expect the trend of [investors] acquiring 'the best-in-niche' to continue in the security industry without let-up over the near future," Kessler said. "When a security company moves up to the top of its niche, it has been acquired as a higher valuation by a big industrial company."
The 10th Annual Securing New Ground conference, held last week, is a partnership of Lehmann Bros., Profinance, Sandra Jones & Company, and BNP Media.
Notable Acquisitions of 2005
In the world of security technology and equipment:
- General Electric buys Edwards Systems (fire systems and equipment)
- General Electric buys Visiowave (video surveillance)
- Verint Systems buys MultiVision Intelligent Surveillance (video surveillance)
- Westec Interactive buys DVDallas (video surveillance)
- Westec Interactive buys D2 Digital Designs (video surveillance)
- Westec Interactive buys Sparta Consulting Group (video surveillance)
- Gryphon Investors & Management buys Consolidated Fire Protection (fire services)
- Steve Roth buys Tri-Ed Distribution (security technology and equipment)
- Roper buys Inovonics Wireless (wireless equipment)
- Honeywell buys Novar (building systems)
- United Technologies buys Lenel Systems International (fire and security equipment)
In the world of alarm monitoring:
- Integrated Alarm Security buys Firstline Security
- Devcon buys Adelphia Communications
- Securitas buys Wormall Electronics Inc.
- Great Hill Partners buys Central Security Group Inc.
- Integrated Alarm Security buys Financial Security Services Inc.
- HSM buys Jackson Burglar Alarm
Source: Lehmann Bros.â€™ Security Industry Annual 2005