Competition Heats Up for Homeland Security Dollars ; Billion-Dollar Government Contracts Have Helped the Security Industry Move into the Stock Market Limelight

Article excerpt

The "war on terror" has brought the homeland security industry into the financial limelight. Screening technologies, biometric identification, "smart" detectors, network security, background and database checking, among other things, are in high demand as the US government strives to boost transportation and border security and improve intelligence gathering.

Security companies have scooped billions of federal dollars in contracts and seen company stocks skyrocket. As a result, a number of new stock indices and investment banks catering to the security sector have appeared on the scene. But industry analysts wonder just how many new security companies the market can sustain, especially with the bulk of the contracts coming from the federal government.

"Since 9/11, hundreds of new companies have appeared," says Jack Mallon, founder and principal of Mallon Associates, an investment bank focusing on the security sector. "But with strong competition and a highly fragmented market, consolidation is inevitable."

On average, homeland security stocks tripled in value within three months of the Sept. 11 attacks, says equity analyst Brian Ruttenbur of Morgan Keegan, an investment firm, although growth has since slowed significantly. One example is InVision Technologies, a California company that installs sophisticated explosive detectors in major US airports. Four months after 9/11, InVision (now owned by GE) saw its stock grow an unprecedented 2,000 percent. Since then, the company has secured billions of federal dollars in contracts, making it one of the single largest recipients of homeland security dollars.

Stock indices focusing on security companies, such as the Spade Defense index or the SecurityStockWatch index, claim a close to 100 percent increase over the past four and five years, respectively - clearly outstripping the Dow Jones and Nasdaq.

Industry watchers are convinced that security is a lucrative issue here to stay, as made evident by the Department of Homeland Security's (DHS) steadily increasing budget. (For fiscal year 2007, President Bush has asked for a record $42.7 billion for the DHS - almost $2 billion more than 2006.)

The hope of securing more government contracts has persuaded some defense contractors to branch out. For instance, Boeing, Lockheed Martin, and Raytheon have dedicated corporate divisions to homeland security or acquired smaller companies in the sector.

War and associated defense spending is "cyclical," says Mr. Ruttenbur. In contrast, "spending on homeland security grows continuously as the threat persists," he says. Ruttenbur expects the DHS's budget to increase by 5 to 7 percent annually over the next 10 years.

According to the Federal Procurement Database, the DHS has awarded at least $15 billion in contracts to the private sector over the past 12 months. …


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