Cargo Inspection: A Port Play

07/15/2005 12:00 am EST

Focus:

Mark Mowrey

Senior Analyst, Al Frank Asset Management

"One area where defense and homeland security spending has been lacking is port safety" says Mark Mowrey, in a recently launched tech-oriented newsletter from the top performing group at The Prudent Speculator. Here's their play on cargo inspection.

"According to the American Association of Port Authorities (AAPA), the US Department of Homeland Security made $141 million in grants available to ports for shoring up security, while a 2002 study by the Coast Guard estimates $5.4 billion would be needed over ten years to comply with new security regulations. One company looking to receive a portion of these funds is security systems manufacturer OSI Systems (OSIS NASDAQ). Its Rapidscan Systems division manufactures an array of person, baggage, and cargo inspection machines, and boasts 50,000 installed systems worldwide.

"To date, investments in cargo security have not produced the hoped-for results. According to port security advocacy group Coalition for Secure Ports, just 5.6% of inbound containers are inspected today using x-ray, gamma ray, or physical methods. Holding up the deployment of more inspection equipment has been the inability of Homeland Security to nail down a set of standards for the machines to be used both in the US and abroad. The lack of funding for broader security measures has also hampered the execution of broader detection endeavors.

"Nonetheless, OSI remains committed to what it believes will be a growth market in cargo inspection. That's a lot of boxes to review. And OSI has some technologies that are unmatched by its competitors. In addition to more conventional x-ray and gamma ray detection equipment, OSI produces neutron-based scanners that can detect the presence of specific types of materials, such as drugs and explosives, inside a container. Used in conjunction with imaging devices, the tools should best help port inspectors ensure the safety of incoming cargo.

"Happily, the company has two other businesses, life sciences and opto-electronics, which are contributing to the top line. In fact, OSI's life sciences business is doing quite well, and should prove to be another base for long-term growth. Fiscal third-quarter revenue was $47.8 million. Growth from the $8.6 million generated in the prior quarter came almost entirely through the acquisition of patient monitoring systems maker Spacelabs. Going forward, the company targeting the $2 billion per year global patient monitoring market. We remain attracted to the long-term earnings potential of these businesses and continue to be buyers of OSI shares."

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