InVision Stock has Soared after 9/11

KATHLEEN PENDER / SF Chronicle 12sep02

[mindfully.org note: Is this how a nation is supposed to exist?]

No stock has done better since last year's terror attacks than InVision Technologies.

Since Sept. 10, 2001, shares in the Newark maker of bomb-detection equipment are up 963 percent. That's the biggest percentage gain for any company on the New York or American stock exchanges or the Nasdaq National Market System.

It's not just InVision's stock price that has soared.

source: Yahoo Finance

Its revenue for the first six months of this year was $101.6 million, up from $34.9 million in the same period last year. Its net income was $12.4 million, compared with $233,000 last year.

For the current quarter alone, it expects to generate more than $110 million in revenue and at least $17 million in net income. That kind of growth is almost unheard of in today's economic environment.

InVision and L-3 Communications Holdings of Massachusetts are the only companies that make explosive detection systems approved for use in U.S. airports. Shares in L-3, a more diversified company than InVision, are up 77 percent since Sept. 10, 2001.

The Transportation Security Agency says it has already bought or ordered enough equipment from the two companies to screen all checked bags at the nation's major airports.

That raises the question: How long can InVision continue to grow?

"Some people are put off by the pig-in-the-python scenario," says Noel Atkinson, an analyst with Emerging Growth Equities. They see InVision "getting really big really fast, then falling away to nothing."

InVision CEO Sergio Magistri insists that, long term, his company can grow 15 to 30 percent a year by selling to foreign airports; selling bigger, faster replacement machines in the United States; and branching out -- largely through acquisitions -- into other types of aviation and homeland security.

But first, InVision's must fill its bulging backlog.

The Aviation Security Act, signed into law last November, orders all major U.S. airports to have enough explosive detection systems to screen 100 percent of checked baggage by Dec. 31.

The House and Senate, responding to complaints from airports, are working on a bill to extend that deadline by one year.

Adm. James Loy, head of the TSA, told Congress this week he opposes "a wholesale delay in the Dec. 31 deadline." He acknowledged that, "in a small number of airports, it may be necessary to push back the deadline for a modest amount of time . . ."

The TSA, which is taking over airport security, has deployed 240 of these systems. It has ordered 425 from L-3 and 675 from InVision, says TSA spokesman David Steigman, adding that these numbers will meet current needs.

InVision makes versions of CTX (computed tomography X-ray) machines. Its 2500 and 5500 are smaller models that typically sit in airport lobbies. They cost $600,000 and $900,000, respectively, and can handle up to 125 bags and 300 bags per hour.

The CTX 9000, which costs $1.2 million and can handle 540 bags per hour, is usually integrated into an airport's baggage handling system.

San Francisco International Airport has six smaller CTX machines in its domestic terminal lobbies.

When passengers check in, if they or their luggage meet certain secret characteristics, they are escorted to the CTX machines, where their bags are scanned for explosives. Then they must return to a ticket counter to check in their luggage.

(Hint to travelers: Don't put film in your checked luggage. If you're picked for CTX, you'll have to dig it out before screening.)

Neither the TSA nor the airlines will say how many passengers are being pulled out for CTX screening, but based on my observations, the number seems to be small.

I made two trips to SFO during peak and off-peak periods. On both occasions,

some of the CTX machines were used consistently, some sporadically and one hardly at all.

In June, Kenneth Mead, the TSA's inspector general, told lawmakers that only 12 out of 138 EDS machines surveyed nationwide were being used at full capacity, and that 75 percent were screening less than half of the bags they could have.

The TSA says utilization has improved since then and will continue to improve as federal employees take over security from the airlines and their security subcontractors.

Until the machines are installed, airports are using other methods to screen checked luggage, such as passenger-baggage matching systems and trace detection, which involves swabbing suitcases with a chemical that detects explosives residue.

Magistri says InVision is making more than two machines per day and can meet the TSA's Dec. 31 deadline.

"I'm reasonably comfortable that between our competitor and ourselves, we will have (approximately) 1,100 units done by the end of year," he says.

Most of the TSA's order is for InVision's smaller 2500 and 5500 machines.

Although the 9000 machines are faster and more efficient, they're much harder to install because they're bigger and heavier and have to be integrated into an existing baggage handling system.

SFO has four CTX 9000 machines in its new International Terminal baggage system and has ordered 10 more, says Magistri.

Magistri thinks more airports will want 9000 machines after they see how much trouble the lobby versions are.

"At the end of this year, aviation security will be enormously better than it was one year ago. It will also be expensive and inconvenient," Magistri predicts.

InVision recognizes revenue when machines are shipped.

Atkinson expects the company will ship about 350 machines this year, 300 next year and 300 in 2004. Even if shipments stall out, revenue and income can still grow because the company will be selling more of the expensive 9000 machines.

He sees revenue growing from $337 million this year to $385 million next year and $390 million in 2004.

Atkinson says the company can earn $2.86 per share this year, $2.92 next year and $2.80 in '04. Atkinson's firm participated in an InVision stock offering this year.

His estimates are on the high side. The consensus per-share earnings estimate, according to I/B/E/S, is $2.87 this year, $2.70 next year and $1.87 in 2004.

InVision stock closed at $3.11 per share before the terrorist attacks. It got as high as $48.29 in March, before a short-selling newsletter highlighted it as an overpriced stock.

It closed Wednesday at $33.06 per share, a price Atkinson considers fully valued.

It's trading at 11.5 times this year's expected earnings.

Although nobody likes to benefit from adversity, Magistri does not apologize for his firm's recent success.

He says InVision invested in its technology for 10 years, losing money in many of them, because it believed there would be a need for better aviation security.

"For a long time we were, as a public company, an outcast. There was no market demand," he says. "I think our people are very much proud to be a contributor to the new way of doing aviation security. We always tried to be as meaningful as possible."