Editor's note: This is the seventh installment in TheStreet.com's Home Front series, a collection of twice-weekly features examining how American business, society and investing have changed in the post-Sept. 11 landscape.
While the attacks of Sept. 11 have left the stock market in a state of uncertainty, there's one area where visibility has actually become clearer. It's the so-called cross-border trade management sector, which streamlines how companies send and receive international product and supply shipments.
Amid stepped-up security at U.S. borders, companies are starting to pay more attention to an area that was once seen as little more than a trivial, unpleasant checkpoint. By one estimate, the market for managing this trade is expected to be seven times higher in 2005 than it was in 2000.
"After the 11th, with the increased scrutiny of cross-border trade, companies that might have been a little lax in the past are making sure that all the i's are dotted and the t's are crossed," says Adrian Gonzalez, senior analyst with research firm ARC Advisory Group in Dedham, Mass. "Because any discrepancy today is just going to hold up a shipment."
Which is where companies that manage that process come in. They have names like
. Of these firms, only Vastera is public. Not only do they help clients make sure incoming supply shipments don't get held up at the border because of poor documentation, they help them "make sure you're not shipping something to the bad guys," says ClearCross CEO Bruce Johnson. After all, do you know how many terrorists are on your client list?
In that area, the software they sell compares international customers with restricted-party lists maintained by the U.S. government.
Greg Stock, VP of marketing at Vastera, puts it this way: "The idea of getting goods across the border and complying with international trade laws is becoming a boardroom issue, and for good reason. I'd just point to a company that was fined $2.5 million not too long ago, with no jail time for any of the executives. Given Sept. 11, we think that's going to change."
Keeping the flow of supplies into the country going smoothly is also critically important to U.S. manufacturing companies operating on "just-in-time" inventory schedules. If those supplies don't come in, business grinds to a halt.
"Compliance has always been important, but now the government's scrutiny of whether you're in compliance or not has increased, and you're going to find yourself in tighter and tighter spots if you're not," says Peter Coleman, an analyst at Banc of America Securities who follows cross-border trade companies and rates Vastera a buy. His firm has done underwriting for Vastera.
ARC estimated earlier this year that the cross-border trade sector could see revenue of $1 billion by 2005, up from an estimated $133 million in 2000.
Many large corporations already have trade compliance departments keeping track of the myriad regulations for each country with which they do business. The State Department counts 191 independent countries in the world, so keeping track of which rules and regulations apply to which states has led many companies to outsource the process.
, for instance, bought a 21% stake in Vastera, and Vastera now handles the carmaker's customs operations in the U.S., Canada and Mexico.
has also signed Vastera to handle its U.S.-based global trade operations.
Other software companies can smell the money in the space too. For instance, supply-chain company Manugistics
has partnered with Vastera to fill out its product line in the cross-border trade area.
The delays that sprang up at border crossings after Sept. 11 have abated somewhat. Even so, industry officials say that although only 2% to 5% of shipments were inspected before the attacks, that rate has risen fivefold. Still, with more than $1.1 trillion worth of goods coming into the country annually, much cargo will go unchecked.
For that reason, Banc of America's Coleman and others talk about an eventual rating system for companies that regularly import and export supplies and goods. Those with a history of compliance will likely be waved through, while habitually disorganized firms will see their products and supplies sit on the dock.
Of course, with only one public company in the sector, the industry is still nascent. Investors have taken notice, though. Helped by a generally positive quarterly report last month, Dulles, Va.-based Vastera's stock is up 38% in post-Sept. 11 trading.
Though the sector has received increased attention since the attacks, and Vastera and ClearCross say they're seeing increased demand, it's unclear how much immediate revenue will result.
"The normal selling cycle for this type of software is already six to nine months," says Robin Roberts, an analyst at Stephens who has a buy rating on Vastera. "It's not like $200 document software that you can buy on a CD. It still has to go through the budget process, and in the current environment, some companies might not have the money to sustain their own business, much less have the money to pay for a software license." Vastera's average selling price last quarter was $400,000. Stephens hasn't done underwriting for Vastera.
This points to the great paradox of the sector: The same event that drew attention to the cross-border trade space may also delay companies from spending money in it. Also, companies probably won't buy this kind of software until they encounter habitual problems at borders, problems that could take several quarters to receive attention.
That issue, along with that fact that it takes people to keep the information in the software current and manage the actual trade itself, gives others pause. This area might not be like your typical software business, where you write it once and sell it many times over.
Ed Wolfe, an analyst at Bear Stearns who has a neutral rating on Vastera, says that last issue is one reason he's only lukewarm on the stock. Vastera's lack of profitability, valuation of more than four times 2002 revenue and its close ties to Ford -- the automaker has a history of wreaking havoc on the profitability of its suppliers -- also concern him.
"Longer term, we still have concerns regarding valuation, the scalability and potential profitability of the managed-service business,
and Vastera's leverage to Ford and its suppliers (together they accounted for over 55% of revenue during the third quarter)," Wolfe wrote in a report subsequent to the company's quarterly report Oct. 25. He declined to comment directly for this story. Bear Stearns hasn't done underwriting for Vastera.
Still, others see a rare silver lining shining through the tragic events of Sept. 11.
"This gives a lot of high-level executives an awareness of cross-border issues," says Stephens' Roberts. "It's definitely an opportunity for companies like Vastera."