For Subscribers

Get the complete article now!

Two analyst and top management from eight sector firms examine the security products & services sector in this special 38-page Security Products & Services issue from The Wall Street Transcript, available at (212/952-7433) or http://www.twst.com/info/info516.htm.

TWST: Following the events of the past year, are we seeing an influx of a lot of smaller companies into the industry?

Mr. Kessler: It’s hard to say. At the commodity end, alarm equipment manufacturers and analog closed circuit television equipment manufacturers can enter this market without a lot of barriers to entry. The problem is gaining share with any account that is meaningful. The largest service companies in the service area that buy from the manufacturers, which would include the ADTs and Securitas’s of the world, buy directly and don’t have to go through the dealer system that has more or less dominated the alarm equipment industry for so long. With consolidation comes these large companies that are increasingly buying directly, making it unlikely that anybody small can gain any traction in this industry. It is clear that there is a lot of technology that has been pumped into this industry for the last 20 years. The problem has been turning technology, along with seasoned management, into mature companies that can generate consistent earnings and cash flows over a long period of time. These characteristics have been the exception rather than the rule in the security industry, and the few companies that end up generating consistent revenue growths and cash flows, such as ADT on the services side, end up being acquired. The same thing can be said for those companies on the equipment side that have generated large enough bases of revenue to be attractive to Wall Street. It seems the minute they’re finally attractive to Wall Street, they also become attractive to large players that want to have a security platform of their own.

TWST: What are your favorite names in the group?

Mr. Kessler: Even though it stretches the definition of security a little bit, we like Symbol Technologies (NYSE:SBL) for the long haul. To some people it’s merely the leading data capture, barcode scanning company; to others it’s a leading mobile wireless local area network company. In reality, Symbol is both, and it’s the only company that is both in a big way. We think Symbol is the only company that has the capability right now of doing major projects that involve the barcoding and ID’ing of many, many objects at the same time, and combining it with mobile wireless computing, such as putting barcodes on luggage in airports, and ID’ing that luggage through the entire trip. Over the very near term, because of the economy, earnings visibility on Symbol is very, very low, and it’s hard to justify any type of major stock price appreciation in Symbol with corporate earnings guidance at just 0.3 for 2002. However, if and when the economy does recover and Symbol is very sensitive to the economy, we believe that with its market leading position, the earnings estimates of this company would rise dramatically when the economy does begin to truly recover.

TWST: Are there any characteristics investors should steer clear of in the group today?

Mr. Kessler: There are a couple of things that have historically been problems in the security industry and there are a couple of things that people should watch out for specific to post-September 11th events. Historically we have tended to get too excited over the newest, whiz-bang security product as the solution to complicated problems, whether it was the inauguration on a mass-market basis of RFID, the introduction of digital video, or the introduction of cheap fingerprint readers. Being able to provide a broad-based solution and being able to provide a recurring revenue and cash flow stream from these broader-based solutions is what investors should be looking for, not some type of hot product.

This special issue includes:

1) Outlook for Security Stocks - In an in-depth (4,000 words) Analyst Interview, Jeffrey T. Kessler, Senior Vice President at Lehman Brothers, examines the outlook for the sector including and shares specific stock recommendations.

2) Security Products & Services - In an in-depth (2,600 words) Analyst Interview, Peter J. Barry, Managing Director for Small Companies at Bear, Stearns & Company, examines the outlook for the sector including and shares specific stock recommendations.

3) CEO interviews (average 2,500 words). Top management of eight sector firms examine the outlook for their firm and the sector.