6 Security Stocks With Upside

NEW YORK (TheStreet) -- A Federal Information Security Market report shows that demand for vendor-furnished information security products and services by the U.S. federal government will increase from $9.2 billion in 2011 to $14 billion in 2016, at a compound annual growth rate of 8.8%.

The proposed $553 billion fiscal 2012 budget for the Department of Defense is $22 billion higher than the 2010 appropriation. This calls for spending $2.3 billion in new and ongoing cyber security research and development at the DoD and improving existing cyber security capabilities. The budget also provides $119 million to support the operational capability of Cyber Command, established in 2010 to direct the operations and defense of specific DoD information networks.

The following stocks could gain from 9% to 46%. They have average buy ratings of 54% and hold ratings of 44%, according to analysts polled by Bloomberg.

The stocks are listed in ascending order of upside potential.


6. OSI Systems ( OSIS) manufactures and sells specialized electronic systems and components used in aerospace, defense, health care and security.

Of the six analysts covering the stock, four recommend a buy and two affirm a hold. The stock's average 12-month price target is $49, about 8.9% higher than the current market price, according to analysts polled by Bloomberg.

The company reported total revenue of $161.32 million for its 2012 first quarter, up 26% from $128.45 million in the same period the previous year. Year-over-year revenue growth reported in the security, health care, and optoelectronics and manufacturing divisions was 42%, 1% and 27%, respectively. Net income grew 40.4%, to $4.76 million, from $3.39 million in the same quarter the prior year.

Total revenue for fiscal 2012 is likely to increase by 13% to 16%, year over year. Diluted earnings per share are expected up 23% to 30%, excluding the impact of restructuring and other charges.

A Southern Louisiana hospital recently placed a $1.8 million order for OSI's patient monitoring solution and ICS G2 enterprise connectivity software. In addition, the company's security division bagged a $10 million order from Eastern European customers for cargo and vehicle inspection systems. Also, the U.S. Department of Homeland Security's Domestic Nuclear Detection Office has awarded it several exploratory research program contracts worth $7 million.

5. Raytheon ( RTN) specializes in the defense, homeland security and other government markets. The company's business is divided into six units: Integrated Defense Systems, Intelligence and Information Systems, Missile Systems, Network Centric Systems, Space and Airborne Systems and Technical Services.

Of the 23 analysts covering the stock, 43% recommend a buy and 52% rate it a hold. The stock's average 12-month price target is 14.0% higher than the current price, at $49.79, according to data compiled by Bloomberg.

Third-quarter 2011 sales were $6.1 billion, with strong bookings of $6.884 billion, vs. $6.038 billion in the third quarter of 2010, leading to a book-to-bill ratio of 1:12. Adjusted earnings per share increased to $1.39 per diluted share from $1.35 per diluted share in the year-ago quarter. Cash flow from continuing operations more than doubled to $859 million from $413 million in the same quarter last year.

Raytheon will deliver 364 satellite terminals to the U.S. military on a contract worth approximately $300 million, a senior company representative told GovCon Wire. The company's One Force communications solution successfully linked soldiers' smart phones and tablets during the recent U.S. Army Expeditionary Warrior Experiment. This enabled simultaneous transmission of data, voice and video over the hand-held commercial devices over both 3G and military tactical radios without any disruption in service.

Mid-November, the company declared a quarterly cash dividend of 43 cents per outstanding share of common stock payable Feb. 9, 2012 to shareholders of record on January 4. The company estimates 2011 net sales between $25 billion and $25.3 billion, and adjusted earnings per share in the range of $5.55 and $5.65. Return on invested capital is estimated between 13.2% and 13.6%.

4. CACI International ( CACI) provides solutions in the areas of defense, intelligence, homeland security and IT modernization to the federal, state and local governments, commercial enterprises and agencies of foreign governments.

Of the 18 analysts covering the stock, 39% recommend buying and the rest suggest a hold. There are no sell ratings on the stock. The average 12-month price target is 21.8% higher than the current price at $67.22, according to data compiled by Bloomberg.

Revenue for 2012 first quarter was $924.4 million, an increase of 10.8% from the same quarter last fiscal year. Net income for the quarter surged to $42.1 million, or $1.41 per share, from $28.7 million, or 92 cents per share, in the same quarter the prior year. Almost 79.3% of revenue was generated from sales to the DoD. During the quarter, CACI received contracts valued at $2.04 billion, approximately 40% from new businesses. As of Sept. 30, total backlog stood at $7.95 billion, compared to $7.47 billion in the year-earlier period.

The company announced recently that it has been selected as one of the 15 prime contractors to support the Recruitment and Retention mission area under the U.S. Army's HR Solutions program for the Assistant Secretary of the Army, Manpower & Reserve Affairs. The contract has a ceiling value of $273 million and is for a base period plus four one-year options. Besides, CACI reports it will oversee the defense medical logistics standard support systems under four prime-task order contracts valued at $69 million.

For fiscal 2012, the company has raised its revenue guidance to be in the range of $3.85 billion to $4.05 billion, vs. the previous view of $3.75 billion to $3.95 billion. Net income is estimated between $157 million and $163 million from the previous guidance of $147 million to $153 million. Diluted earnings per share are pegged between $5.55 and $5.80, vs. the earlier outlook of $4.70 to $4.90.

3. Cubic ( CUB) designs, manufactures and sells technology systems for the defense, transport, and cyber security and asset-tracking business. During 2010, the company expanded its product line through two acquisitions, including cross-domain hardware solutions for multi-level security requirements and multi-band communication tracking devices.

Of the seven analysts covering the stock, three recommend a buy and four suggest a hold. The 12-month average price target is $53.00, about 31.1% higher than the current market price, according to data compiled by Bloomberg.

Total revenue for fiscal 2011 was $1.29 billion, up 8% from $1.19 billion reported in the prior year. Organic revenue growth reached 50%. The company generated nearly 56% of 2011 revenue from sales to the U.S. government, its largest customer. Gross margin from product sales improved to 29.2%, vs. 28.1% in fiscal year 2010, while gross margin from service sales jumped to 19%, compared to 13.1% in the prior year. Net income was $84.8 million, compared to $70.6 million in fiscal 2010.

Cubic Transportation Systems, a unit of CUB, recently won a contract from Chicago Transit Authority worth $454 million. The U.S. Army has awarded Cubic Applications a contract for mission support services for the U.S. Army Maneuver Center of Excellence at Fort Benning, Georgia.

In addition, Cubic Defense Applications secured a task order totaling $16.8 million for Instrumentable Multiple Integrated Laser Engagement System Tactical Vehicle System kits from the U.S. Army's Program Executive Office for Simulation, Training and Instrumentation.

2. Harris ( HRS) is an international communications and information technology provider serving governments and commercial markets in more than 150 countries. It operates in three segments: RF Communications, Government Communication Systems and Broadcast Communications.

Of the 15 analysts covering the stock, 67% say buy and the rest say hold. There are no sell ratings on the stock. The average 12-month price target is $48.80, about 44.0% higher than the current price, according to a Bloomberg consensus.

Revenue reported for 2012 first quarter was $1.46 billion, compared to $1.41 billion in the same quarter in the prior fiscal year. GAAP net income for the quarter stood at $122 million, or $1.04 per diluted share. Orders increased 23% to $1.62 billion from the year-ago quarter and 20% sequentially.

At the end of October, the company declared a quarterly cash dividend of 28 cents per share on its common stock payable Dec. 2 to shareholders of record on Nov. 18. Mid-November, Harris announced plans to build a $100 million high-tech center on its Palm Bay campus for some of its most advanced engineering efforts. Construction is expected to begin by mid-2012 and complete by 2014.

Mid-November, the company received a $15 million order from the U.S. Air Force for additional Falcon III AN/PRC-117G multi-band man-pack radio systems. The product provides situational awareness on the battlefield by delivering critical real-time information to soldiers on the move.

The company has reaffirmed its guidance for fiscal 2012, estimating non-GAAP net income per share in the range of $5.1 to $5.3, and GAAP net income per share of $4.92 to $5.12. Revenue is pegged between $6.15 billion and $6.30 billion, increasing 4% to 6% year over year.

1. Booz Allen Hamilton Holding ( BAH) provides management and technology consulting services to the U.S. government in the defense, intelligence and civil markets. It offers four key capabilities (such as strategy and organization, analytics, technology and operations) to almost 800 of the more than 1,300 client organizations in the government.

Of the 11 analysts covering the stock, 64% recommend a buy and 27% rate it a hold. The stock's average 12-month price target is $20, which is 46% higher than the current price, according to analysts polled by Bloomberg.

The company recorded revenue of $1.43 billion for its 2012 second quarter, an increase of 4.5% from the same quarter in the prior fiscal year. Net income increased to $75.3 million, or $53 cents per diluted share, compared to $14.8 million, or 12 cents, in the same quarter the prior fiscal year. At the end of September 2011, BAH had record order backlog of $12.86 billion, up 16.4% from the year-ago period.

Booz Allen expects higher growth in the second half of fiscal 2012, as it plans to deploy staff against recent contract awards. Diluted earnings per share guidance for fiscal 2012 is $1.56 to $1.66, vs. the earlier view of $1.40 to $1.50, based on the gains from its state and local transportation business in July 2011.

In the first week of November, the U.S. Navy awarded Booz Allen cost-plus-fixed-fee, indefinite-quantity, multiple award contracts to provide the deputy chief of Naval operations and the Navy's chief of personnel with professional, technical and administrative support services. The contract is worth $12.35 million with options that could increase to $37.9 million. With these options exercised, the work could go on through November 2014.

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