In the Right Place, at the Right Time

09/01/2006 12:00 am EST


Gregory Spear

Editor and President, The Spear Report

Spear’s Security Industry Analyst finds much to like about a company making its name by helping thwart terrorism. With unique products, a growing market—both domestically and internationally—and new innovations coming down the pike, this company looks attractive…


“American Science and Engineering ( ASEI NASDAQ) develops sophisticated X-ray inspection products used to verify contents and detect contraband in shipping containers, vehicles, airline cargo, luggage, carry-on bags, and on passengers. About 75% of ASEI’s sales come from the US government or government contractors.


“American Science's bread & butter product is an $800,000 mobile X-ray screening system that can scan the contents of a vehicle or cargo container in a drive-by manner. It is currently used in Eastern Europe and Iraq to inspect vehicles crossing the border. The US government recently ordered eight equipped with AS&E's Radioactive Threat Detection (RTD) technology to locate nuclear devices and dirty bombs hidden in vehicles or containers.


“The system that holds the most promise for ASEI, however, is the new SmartCheck system, currently being reviewed by the Transportation Security Administration (TSA). It scans people with a capability far superior to the conventional metal detectors one finds in all US airports because it is able to simultaneously detect both metallic and nonmetallic contraband, including plastic explosives and composite weapons, showing exactly where the item is hidden on the body. These machines sell for $1 million and the potential market is about $1 billion globally. This type of technology is deployed at every Israeli airport for passenger scanning but it is not yet approved in the US.


“ASEI’s immediate future prospects are directly tied to the international market. Happily, in the most recent reported quarter, 58% of current bookings were from international clients. AS&E ended the second quarter with a backlog of $63 million, up 21% over the same period last year.


“The company reported an exceptional fiscal year that ended in April, growing revenues by 85% and earnings by 150% (to $3.27/share), but the stock began to sell off after that, losing half its value by the time it reported its next quarterly results. Those numbers were not impressive, reduced by income tax increases, and stock compensation accounting, and the stock lost another 20% of its value. We also believe ASEI has been a target of short sellers. As the only mature pure play in the explosive detection field, we consider ASEI a gem of a company and a takeover target. The stock rallied sharply on Thursday (8/9) on the terrorism news and recovered all its recent earnings decline. We bought it on that day for the A-List. If you didn’t get in on that opportunity, look for a pullback as terrorism recedes from the headlines.”

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