New Wave of Money Lets Homeland Security Ride Again

Money allocated for homeland security, together with technological and business developments over the past year at NICE-Systems Ltd. and Verint Systems Inc. (Nasdaq:VRNT) are boosting their business and investors' profits. As of now, the difference between the two companies' market caps is narrowing. Verint trades at a market cap of about $1 billion, and NICE at $727 million.

It should be stressed that each company focuses on a different homeland security target market. Verint's systems are designed for the FBI and CIA, while NICE's systems are designed for rescue services, such as the police, fire fighters, ambulance services and the like. So far as is known, both companies market advanced video systems designed to secure public places, such as bus and train stations, airports, etc.

Verint sells surveillance and monitoring systems to telecommunications operators that are required by the authorities to secure their infrastructures, in order to intercept suspicious communications between hostile elements. After intercepting communications between hostile elements, Verint's systems analyze the results and alert the relevant authorities.

NICE's systems record calls to rescue service centers and calls between the centers and units in the field. The systems analyze the communications, reach conclusions about follow-up actions, and send the conclusions to the relevant authorities.

As noted above, both companies supply advanced video systems that analyze suspicious activity in public places, military bases, and so on, sending alerts in real time to security forces in the field.

"Barron's" recommends NICE and Verint's shares in this week's lead article on homeland security. "Barron's" writes that since the September 11 attacks, "the federal government has spent more than $130 billion on homeland defense since the attacks of Sept. 11, 2001, and a further $50 billion or so is budgeted for fiscal '06, with more to come after that. State governments, quasi-government organizations, large cities and private companies are spending heavily too, as are many foreign countries."

"Barron's" cites studies by Forrester Research and the Civitas Group indicating that the US allocates $23 billion a year on counter-terrorism products and services, with other countries allocating a similar amount. "That has fueled fast growth in an entirely new industry of homeland-security providers Indexes of homeland-security stocks more than tripled between 9/11 and the closing days of 2004, trouncing the broad market -- but then went into a slump.

"The downturn, which started in January and lasted through mid-April, wiped 25% off average values. The initial cause was selling of stocks that had been bought ahead of the November presidential election as financial protection against a terrorist bombing. That didn't happen, of course, and concerns mounted that Washington's budget realities would force anti-terrorism spending cuts and that the sector had become overheated. Now, those fears are played out, to the point that homeland-security stock prices have started trending higher. Today, once again, there's money to be made in fighting terror.

"There is terrific long-term growth potential here, with the prospect for continuing double-digit growth for years to come in some sectors," says Mike French, an analyst with New York investment firm Kaufman Brothers. "After 9/11, the focus was hiring and training people to protect us -- sky marshals on planes, extra border patrols and particularly luggage screeners at airports," says Brian Ruttenbur, an analyst with Memphis brokerage Morgan Keegan. "Now that this is mostly in place, the emphasis is on trying to establish new and better early-warning systems of various kinds."

"Barron's" says there are systems for spotting suspicious key words and sentence patterns in telephone conversations and e-mails. One of the companies providing these systems is Verint. In the 12 months ending in January, Verint's revenue rose 30% to $250 million, two-thirds of which came from the homeland security market, and this growth is expected to continue.

"The market for surveillance and monitoring in all its forms is worth perhaps $7.5 billion a year worldwide and is growing at an estimated 25% to 30% a year

"This includes the advanced video and infrared camera systems being used for surveillance at border crossings and high-risk sites like city centers, nuclear-power plants and bridges -- gear made by the likes of Raytheon, L-3 Communications Holdings, Flir Systems and Israeli-based NICE Systems."