Airports around the world announced plans this week to significantly beef up security, after U.S. and European intelligence officials said that a chartered Russian jetliner that crashed in the Sinai Peninsula, killing all 224 people on board, may have been brought down by a terrorist bomb on board.
As civilized human beings, we're appalled by these events. But one of the surest ways to make money is to tap into inevitable trends, even if those trends aren't pretty. Terrorism remains a constant risk that nations will spend huge sums to fight, far into the foreseeable future.
Smiths Group, a London-based manufacturing conglomerate, specializes in the advanced body scanners that are increasingly coveted by airports and other security-conscious organizations around the world.
The company's Smiths Detection division makes body scanners and equipment for the detection of weapons, explosives, chemical agents, biohazards, narcotics and contraband. Smiths Detection represents roughly 20% of the company's total sales.
Threats to the flying public remain in the forefront of terrorism concerns. Frost & Sullivan estimates that the market for global airport security technology will reach $12.67 billion by 2023, up from $8.22 billion in 2014.Demand for scanners will be especially acute in terrorism-wracked areas such as the Middle East and India, as well as China's rapidly expanding civil aviation sector.
The Obama administration has proposed deploying as many as 1,275 full body scanners in U.S. airports. In September, Smiths was awarded a $6.5 million contract by the U.S. Transportation Security Administration to supply Advanced Technology X-ray scanners for carry-on baggage screening. Similar Smiths scanners are already deployed at several airports throughout the U.S.
Smiths Detection commands about one-third of the scanner market, making it the world leader. In addition to airports, the company also supplies scanners to hospitals, prisons and militaries around the world.
Smiths Detection is the leading maker of millimeter-wave, or "full body" scanners, which are increasingly seen by security officials as the most effective way to prevent terrorist infiltration at key checkpoints.
These scanners work by using low-level radio waves; two rotating antennae cover the passenger from head to foot with radio frequency energy. In about 40 seconds, the scan produces a negative-like image that depicts anything under a passenger's clothing, including plastic, chemical explosives and non-metallic weapons not revealed by conventional security methods.
Smiths Detection recently unveiled a next-generation explosives scanner for baggage that uses 3-D technology to detect not just metals but also ceramics, plastics and liquids.
Despite these strong trends in its favor, Smiths has a reasonable, trailing-12-month price-to-earnings ratio of 16. California-based OSI Systems, the parent company of Smiths' direct competitor Rapsican, has a P/E of 27.
For its 2015 fiscal year, which ended on July 31, Smiths posted a net profit of 246 million pounds ($382.3 million) for the year ended July 31, up from 233 million pounds the previous year. Smiths' stock has risen about 4% since the Russian jetliner crash was reported on Oct. 31.
Smiths' other major competitor in the scanner market is L-3 Communications, which now has an absurdly high P/E of 79, even though it reported a huge loss in the third quarter. L-3 also is a broad-based defense contractor that lacks Smiths' market presence and advanced technology.
Counterterrorism spending will only increase in future years. And that's why DARPA, the Pentagon's famous research arm that helped developed the Internet and GPS, is at it again. They've developed an innovation so ground-breaking it's been called "the greatest game changer in Army history since the machine gun." To learn how to invest in this opportunity, click here.