This column was originally published on RealMoney on March 2 at 12:32 p.m. EST. It's being republished as a bonus for readers.

Port security is all over the news nowadays, and the issue has been providing plenty of material for the late-night monologues. While everyone's focused on the proposed takeover of six U.S. ports by a United Arab Emirates company, a bigger issue is how well we're monitoring the activity at our ports right now. At the least, it's brought port security into the limelight, and that's good news for American Science & Engineering ( ASEI). But this company is much more than merely a port security play.

American Science's sophisticated X-ray inspection products are used to protect high-risk government personnel and facilities. The Secret Service uses them, for example, to screen visitors who are entering the White House or boarding Air Force One. And the company's ParcelSearch Inspection Systems are used in high-security federal facilities to scan parcels, baggage and mail for potential threats.

But American Science's gear is more widely used for the inspection and clearance of cargo, trucks and cars at seaports, borders and airports.

And that brings us to the issue of the day, port security.

According to the U.S. Customs Service, around 90% of global trade is transported by cargo containers. Each year, nearly 6 million sea containers enter U.S. ports, and although data and information are screened for potential threats, only 6% of cargo containers are physically inspected. The renewed focus on port security certainly bodes well for American Science's CargoSearch family of X-ray scanning systems.

Last fall, the company released its newest cargo- and vehicle-inspection system, the OmniView. It combines backscatter imaging technology with high-energy transmission X-rays to detect contraband or threatening materials such as explosives, and it can penetrate up to 14 inches of steel.

In December, the U.S. Department of Defense placed the first order for an OmniView System. Then, Wednesday morning, American Science announced that it was awarded a $45 million OmniView contract by an unidentified Middle Eastern country. (Ironic, isn't it, that while we're debating the merits of a Dubai-based firm, an unspecified Arab country is loading up on the latest made-in-the-U.S.A. port security gear?)

Port and Border Security

Another homeland-defense issue currently in the spotlight is border security, both in Iraq and here. "Our nation needs orderly and secure borders," President Bush declared during the recent State of Union address. "To meet this goal, we must have stronger ... border protection."

One way that the government is improving border security is by increasing its use of technology at the borders. Sure enough, the following week the president proposed spending over $10 billion on border protection.

American Science's premier product is the Z Backscatter Van, a mobile X-ray screening system built into a delivery van. It utilizes the company's Z Backscatter X-ray technology to produce picture-perfect images of the contents of a vehicle or cargo container, highlighting organic materials such as plastic explosives or other anomalies.

One way the military is using the Z Backscatter Van in Iraq is to detect insurgents attempting to cross the border. " It's a system that is in place across Iraq at all of the major ports of entry," said Maj. Gen. Rick Lynch in a Dec. 1 briefing.

Its success in identifying threats in Iraq could easily translate into increased use domestically in defending our own borders. That's a priority of the president, and it could be a big driver for American Science as the company captures its share of the billions of dollars allocated for border security.

No matter their intended use, all of the company's X-ray systems rely on its patented Z Backscatter technology.

When low-power X-rays are directed toward an object and are dispersed, rather than absorbed, Z Backscatter captures these scattered X-rays and uses them to create highly readable, photo-like images. Low-density objects -- such as drugs, explosives, or people -- reflect X-rays effectively, and so they're easily identifiable in Z Backscatter images, even on the most complex backgrounds.

Backscatter Ties In With X-rays

Many of American Science's products combine Z Backscatter technology with traditional, more powerful X-ray gear. Used together, the methods allow even more information about the contents of a parcel or container to be revealed.

For example, backscatter X-ray technology is also being applied in American Science's new SmartCheck system, which is being considered by the Transportation Security Administration to screen passengers in U.S. airports by peering beneath their clothing.

Its capability is far superior to metal detectors because it's able to simultaneously detect both metallic and nonmetallic objects, such as guns and knives, plastic explosives, composite weapons, drugs and other hidden threats. Plus, its easy-to-read image makes it clear exactly where the threat or contraband is hidden, eliminating the need for intrusive and time-consuming pat-down and strip searches.

The SmartCheck system uses a sophisticated software algorithm to filter the image so that only an outline of the scanned individual can be seen, alleviating privacy concerns and destroying the fantasies of perverts everywhere.

Some industry observers note that, with roughly 550 commercial airports in the U.S., the domestic market alone for the SmartCheck could surpass $500 million. Globally, it could be twice that. In the recently proposed budget, $80.5 million has been allocated toward the purchase and deployment of next-generation passenger screening technologies like the SmartCheck.

Of course, as the number of American Science devices in the field grows, the company will be called upon for more service and maintenance business. That helps to boost its revenue and profitability, as service and support generates lush margins.

Around three-quarters of the American Science's sales are to the U.S. government or contractors working with the government. But international sales are a high priority, and the development of the company's overseas business will be a big driver.

It's already under way.

In early January, American Science announced a marketing and distribution agreement with Nuctech Company Ltd. that will give it access to the high-potential Chinese market. American Science's X-ray technology will certainly come in handy as Beijing prepares to host the Summer Olympics in 2008.

The Z Backscatter Van has also been tested in Eastern Europe, and helped customs officials there find a sizeable amount of cigarettes and tobacco that were illegally being smuggled from the former Soviet Union into Europe to avoid the tax man. So the potential uses, internationally, are diverse.

From small letters and packages to large containers and trucks, when it comes to X-ray scanning technology, American Science has it covered. And the proof is in the company's stellar fundamentals.

Scanning the Numbers

Sales were $38.5 million in the December quarter, 64% higher than prior-year levels. Earnings have also skyrocketed, with triple-digit growth in recent quarters. On an annual basis, American Science is expected to earn $3.78 per share in 2006, a 189% jump from the $1.31 earned in 2005.

Not only are American Science's sales and earnings growth impressive, its profitability is steadily improving. For the past three quarters, all margin measures have swelled compared to the prior year. Analysts also expect profitability to continue to expand, boosted in part by high-margin service and support revenue.

But my valuation work reveals mixed results. Relative to its peers, American Science is cheaper in terms of its price/sales and earnings multiple, plus it sports a higher-than-average growth rate. On the other hand, Bloomberg's dividend discount model indicates that the stock is quite overvalued, with a theoretical price in the mid-$30s. That's significantly lower than where the stock is currently trading, which is closer to $70.

Still, last week the stock broke out of a six-month base on heavy volume, providing the perfect entry when it traded above its November high of $74.95. I wouldn't chase it past $79, as many breakouts eventually pull back to their pivot at some point. But under $79, I like it for the long-term.

Bottom line is this: Terrorist threats come in all shapes and sizes. And criminals will go to great lengths to smuggle illegal drugs and other contraband into places where they are not welcome. American Science's X-ray scanning technology is helping to thwart their efforts and is boosting its sales and earnings in the process.
At the time of publication, an account managed by Charles Norton was long American Science & Engineering, although positions may change at any time without notice.

Charles L. Norton, CFA, is a principal of GNI Capital, Inc., an SEC-registered investment advisor that provides investment management expertise for separately-managed equity, fixed income and ETF portfolios and a hedge fund, and is co-portfolio manager of the Vice Fund (VICEX) and the Generation Wave Growth Fund (GWGFX). In addition, Mr. Norton authors a twice-monthly newsletter, Supernova Stocks, which focuses on investments in market-leading stocks with unique and extraordinary growth potential. Mr. Norton had been a vice president in the equity research department of a New York-based hedge fund, where he also managed separate accounts for high net worth clients. Prior to his experience on the buy side, Mr. Norton worked in the investment banking division of Salomon Smith Barney, where he was an analyst in the health care group, reporting directly to the head of the group. While Mr. Norton cannot provide investment advice or recommendations, he appreciates your feedback; click here to send him an email.