Sunday, January 16, 2005

Coming mergers in the defense/security sector.

Now that the expected defence budget cuts have started (finally, all that pork!), expect established defence biggies like Lockheed Martin (LMT), General Dynamics (GD), Textron (TXT), Northrop Grumman (NOC), United Defense (UDI) to start going after smaller/smarter companies catering to the new post-9/11,post-Iraq security needs.

I hope to make a longer, detailed post later on this topic, but here is a short list of targets (the ones I own have a * next to them).
  • Titan (TTN) *: Expect this defense contractor (along with others) to get bids soon. Some, including Titan have been tarnished following the abuses in Iraq and the investigations that followed. In the worst case, these will get taken out by some private equity player like Carlyle Group and enter the cozy world of Pentagon/lawmakers/lobbyists/directors, away from the public gaze. Titan had an offer earlier from Lockheed, but it has been put on hold pending completion of investigation into Titan's practices.
  • Raytheon (RTN) *: There were rumors earlier about General Dynamics being interested. I think this will happen this year.
  • Cogent (COGT), Identix (IDNX) *, Viisage (VISG) : Have you been fingerprinted / photographed / retina imaged recently on re-entry to the US ? (I was!). Chances are that one of these 3 had something to do with the software/hardware/processing system behind the setup.
  • Ceradyne (CRDN) *, Lakeland (LAKE), Armor Holdings (AH), DHB Industries (DHB) : Iraq has shown that the US forces are really not prepared for urban warfare, which will likely be the most common form of battle in the future. These companies have the next generation of small/smart armored vehicles / protective clothing made with new ceramic materials.
  • Accenture (ACN) *, Bearing Point (BE) *: These are getting to implement some of the larger software projects to warehouse and process info about visitors to the US.
  • CompuDyne (CDCY) : Niche players like this maker of (among other things) bullet/blast-proof doors for US embassies around the world will make for good targets.
  • Taser (TASR) : Now that day-traders/momentum-chasers have ditched this stock, expect someone like Lockheed to make a move. The cozy/almost-incestous world in which these defence players live in was demostrated recently when it was revealed that Bernard Kerik, Homeland Security Secretary elect, had made a few million as a director at Taser! Expect Taser use to spread from police departments to the armed forces.
  • Cornell (CRN), Geo Group (GGI) (formerly Wackenhut): As the country lurches towards the right, expect more states to follow progressive! California's recently announced lead in cutting benefits to elderly/low-income sections/teachers etc and building more prisons and putting more people behind bars! That should help these correctional service providers.
  • Engineered Support Systems (EASI), Innovative Solutions and Support (ISSC) : Specialty military equipment.
  • Hollis-Eden Pharmaceuticals (HEPH) *, BioSante Pharmaceuticals (BPA) : Bio/nuclear protection/shield.
  • Acxiom (ACXM) *, Digimarc (DMRC) * : Background checks, Identification cards. Acxiom was among the first companies contacted by the various investigative agencies to trace back the activities of the 9/11 hijackers.
  • Ipix (IPIX), Lojack (LOJN) * : Companies that were not doing anything with security earlier, but are now trying to get a piece of the pie.
  • OSI Systems (OSIS), American Science & Engineering (ASIE) : cargo inspection / x-ray systems. The biggest player in this sector, Invision Technologies was acquired by GE last year, after a spectacular runup from around $2/share before 9/11 to a final price of $50!

Most of these are expensive right now, since most of the good news, whether as increased orders or as takeover targets, is priced in. But individual players suffer setbacks occasionally on contract losses/cancellations or earnings misses and that should provide for a good entry point.

If investing in these companies makes you squirm, I suggest redirecting your profits to ACLU or the Sierra Club - seriously!

As for the suggestion that investing in these companies is the same as funding them, well, guess where your tax dollars are going!


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