Port Security...

03/03/2006 12:00 am EST


Mark Mowrey

Senior Analyst, Al Frank Asset Management

The media's current focus on port security makes the latest stock overview from Mark Mowrey particularly timely. Here, the editor of the TechValue Report, looks beyond the political rhetoric at a "security" that is poised to benefit from increased attention to port security.

"When it comes to US ingress/egress points, few companies have as comprehensive a set of gear as Buckingham TechValue Portfolio member OSI Systems (OSIS NASDAQ). We got off to a tough start with OSIS, its shares suffering a huge decline very early on when the company cut its fiscal third quarter ((March 2005) earnings guidance from breakeven to losses of between $0.13 and $0.15. At the time, the firm’s security group was having lots of trouble getting folks interested in newfangled cargo security systems, even as its personal and baggage screening machines were selling rather well.

"Those troubles continued through the next two quarters, while the healthcare division lengthened its stride and chased ahead. In the latest quarter, however, the security biz caught its breath and seemed to regain its footing. OSIS's Rapiscan division found approval for its X-ray-based checked baggage screening systems from the UK Department for Transport in December. The acceptance paved the way for near around-the-world adoption of the gear which can process 1,800 bags per hour, or approximately four-times faster than the Explosives Detection System machines currently deployed at US airports.

"Rapiscan received its first order last month and believes that the market for checked baggage screeners could total 'several hundred systems' over the next five years, not including the US, where separate approval is still needed. OSI also noted that cargo-related sales are gaining momentum. The even brighter spotlight now on US port security may prompt customs agencies to hasten their deployment of screening systems. According to the Government Accountability Office, there are more than 300 ports in the US with a total of 3,700 cargo and passenger terminals. In 2004, says GAO, more than nine million cargo containers were offloaded at US seaports.

"To date, the Department of Homeland Security has chosen to focus on overseas inspection of containers, setting up a system called the Container Security Initiative (CSI) to examine ‘high-risk’ containers before they leave foreign ports bound for the US. That system allows US Customs and Border Protection to screen information on cargo headed for US shores. CSI is targeting that by the end of governmental fiscal 2006, ending this September, there will be 50 international ports in the program.

"Air cargo inspection seems even further behind, as industry estimates show that only a very small percentage of the total cargo placed on passenger aircraft is physically screened or inspected. That says to me that more actual screening of containers traveling by both land and air is needed, a statement echoed by many as the recent Dubai deal placed greater emphasis on the relative lack of security in seaport trade operations. Again, that should be good news for OSIS, whose products apply to most, if not all, cargo and passenger screening situations."

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