Shocking Nuclear Breach Highlights 3 Defense Investments

An 82-year old nun may have just signaled a coming wave of potential business for several Department of Homeland Security contractors. Congress will be asking questions for months about how Sister Megan Rice and two others – ages 57 and 63 – were able to penetrate four physical barriers to reach the outside wall of the nation's only weapons-grade uranium storage facility in Tennessee last week. The incident was a shocking failure for DHS, as well as for G4S, the parent of the private company hired to protect the facility. Perhaps unexpectedly, the breach may turn into a business opportunity for other major contractors – the ones that sell technology solutions to beef up the physical and online security of other nuclear and chemical installations. Moreover, the breach could create even more business for infrastructure protection and threat-detection technology providers if there is a thorough review of security holes at the nation's energy storage facilities, pipelines, dams and other critical installations. The top 25 Department of Homeland Security contractors were awarded $5.78 billion in contracts for fiscal year 2011, up 7.6 percent from the previous year according to researchers Philip Finnegan and Peter Barnes at Homeland Security Today . Much of that spending increase was focused on Coast Guard initiatives, representing $3.7 billion in contract obligations. Northrop Grumman NOC led the way with two contracts of about $480 million each for next-generation cutter ships to protect borders and waterways. Computer Sciences Corp. CSC also was a major winner, with a $500 million contract to beef up technology at the U.S. Transportation and Safety Administration. Spending on border security and air safety spending is likely to continue as both are likely to remain top overall priorities. The nuclear security incident last week could possibly shift spending on those priorities to protect key infrastructure. This shift would likely create more sales opportunities for the following three companies: Raytheon: RTN: This defense technology provider has a vested interest in building up its Homeland Security business as a means of revenue diversification. The company is known mainly for its missiles. It received an additional $604.5 billion defense budget request just this week. Raytheon also is leading the way with some border security and infrastructure protection technologies it has acquired through acquisition in the past five years. That includes command systems for security perimeters, identity management technologies and mobile nuclear radiation detection systems. Within its DHS unit, Raytheon has a Critical Infrastructure Protection unit that focuses on protecting nuclear plants, shipment facilities, petrochemical plants, refineries and pipelines – the type of infrastructure that is likely to face additional scrutiny. The company is among a a decreasing number of well-known U.S. stocks trading for less than 10 time forward earnings that also have a strong dividend yield, which is 3.6 percent for Raytheon. American Science & Engineering ASEI: The company's shares are up 12 percent in early trading Friday, following a strong earnings report and a stock repurchase announcement. It could see additional gains should DHS choose to implement its Z Backscatter scanning and detection systems more broadly. The technology helps to detect explosives, illegal immigrants and other items that might elude traditional X-ray scanners. DHS is mainly using the technology at airports. The security breach appears to highlight the need for Z Backscatter within infrastructure facilities, domestic security checkpoints, as well as for freight and vehicle screening at critical facilities. The stock trades around 29 times forward earnings – a strong premium to peers, but that also is due to high operating margins and miniscule debt levels. Harris Corp. HRS: This firm has potential to benefit from an increase in arguably the most critical defense measure: communications. Harris is a leader in selling radios and systems to DHS, as well as to other utility companies and transportation facilities. All of those radio systems are supposed to be integrated, and make the switch away from analog networks to secure digital ones. As U.S. Troops make their way home from Afghanistan, it had been assumed that the company's communications segment would see lessened demand. However, the latest security breach may help spur its communications market domestically. Harris has 6.9 percent of sales sold short due to its slowing revenue growth. It may still be a stock to put on the radar, however, if it continues to win DHS contracts. It remains one of the lowest-priced defense contractors, trading at 8.4 times forward earnings.