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Global Security Threats: A Boon for Precision Instruments Companies?
There is no denying that in the post-9/11 era, the need to protect against terrorism and other types of security threats has grown ever so great. Over the past decade, a series of events has triggered a global effort, of sorts, by governments to beef up security to ensure public safety. Indeed, following the horrific September 11, 2001 attacks in the United States and other terrorist incidents, around the globe, government-issued mandates in the United States have required a range of facilities, from airports to sporting venues to border crossings, to install better inspection equipment capable of detecting weapons, explosives, harmful substances or materials, and other contraband. Those have included hold baggage and cargo screening systems.
More recently, the attempted bombing on Christmas day, 2009, by a Nigerian national, who hid explosives in his underwear, aboard a Northwest Airlines flight bound to Detroit, Michigan from Amsterdam, prompted a push by government and public officials for the installation of body (or people) scanners at airports. Since then, the Transportation Security Administration (TSA), the agency within the U.S. Department of Homeland Security (DHS) responsible for securing aviation, land, and water transportation systems, began a widespread deployment of body scanners at U.S. airport checkpoints.
But at what price does the protection of the public come? It’s no surprise that sophisticated threat-detection systems cost millions of dollars. But the stakes may be higher in other than the financial sense. In fact, the use of body scanners, in particular, has sparked controversy. First, there is the question of whether use of the devices constitutes an invasion of privacy. Body scanners essentially take snapshots of an individual’s body, underneath clothing, to help detect hidden explosives and weapons.
Opponents, including privacy advocate groups, some elected officials, and organizations, such as the American Civil Liberties Union (ACLU), argue that use of the devices and the images produced are a clear violation of an individual’s Fourth Amendment right under the U.S. Constitution, which protects against “unreasonable search and seizure”, unless there is probable cause and a warrant is properly issued. The same goes for a physical pat-down search. But that would be a small price to pay to ensure safety, suggest supporters who claim scanners do a better job at spotting concealed weapons than metal detectors, and thus help to reduce the risk of potential security threats. The TSA further maintains that the images gathered at the time of a scan are not stored or transmitted, but rather deleted once the process is complete.
Another point of contention is the safety of the scanners. Many of the scanners installed in the United States and across Europe are “backscatter” X-ray machines, which emit ionized radiation. Proponents, including the TSA and DHS, say that the levels of radiation emitted are likely too small to pose significant health risks. The FDA supports this claim, pointing out that the radiation exposure from these scanners is within the allowable limits. So the benefits seem to outweigh the risks. Scientists and other critics, on the other hand, indicate that while radiation levels emitted are believed to be minimal, repeated exposure can elevate a person’s risk of developing cancer. That could be of special concern to frequent fliers. A better option, opponents say, are millimeter-wave scanners, which are about as good as backscatter X-ray devices at detecting concealed material (although some believe the latter are superior), but use low-energy radio frequencies instead of harmful X-rays.
Interestingly, in mid-November, Europe banned “backscatter” X-ray scanners from its airports due to health and safety concerns; millimeter-wave scanners are permitted, though. Some critics are turning up the heat by calling for clinical studies and Congressional action, with the hopes that the United States will do the same—scrap the backscatter X-ray machines and ramp up the millimeter-wave scanners instead. But that seems unlikely for now, especially given the TSA just deployed some 250 backscatter X-ray devices at airports nationwide. Of course, for those concerned about radiation exposure, the alternative to a scanner is a physical pat-down search, although the downside is that it is time-consuming and leads to massive delays at airports, not to mention it adds to the frustration of travelers. Critics say this, too, is invasive and a violation of Fourth Amendment rights.
So far, California-based OSI Systems (OSIS) has benefited from the move to install better threat-detection systems, including body scanners. Through its Rapiscan Systems unit, it manufactures an array of sophisticated screening and scanning devices for various applications, such as baggage and parcel inspection at aviation, land, and water checkpoints. The stock has soared of late, as lucrative contract wins from the TSA for its instruments have been a boon to the company’s sales. But, the EU’s recent ban on “backscatter” X-ray airport machines (the kind OSI manufactures) and increasing pressure from privacy and health advocates, can hurt the company’s business and, hence, its stock. We’d be interested, perhaps, in the name on a pullback however, considering the growth potential of its other screening devices and business segments.
Meanwhile, L-3 Communications (LLL) is a good momentum play, and the issue could stand to get a bigger lift. Unlike OSI, this precision instruments maker produces millimeter-wave scanners. L-3 has received orders from the TSA for its equipment and might well get more, especially if government regulations change. Heightened government security measures are having an overall benign effect on Analogic Corp. (ALOG), too. The company recently got the TSA’s nod on its high-speed explosives detection system, which is now certified to be used for checked-baggage screening. New standards established in Europe should help drive demand for Analogic’s security technology. But, as with OSI shares, investors should wait for a pullback here.
At the time of this writing, the author did not have positions in any of the companies mentioned.