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I've been keeping American Science and Engineering (ASEI) in the back of my mind for quite some time. I first heard about them last year in a financial newsletter, and have watched with some interest as the stock has fallen precipitously over the past few months. I'm wondering if now is a good time to open a position.

ASEI is a security technology company. Their primary product is the Z-Backscatter Van [ZBV], which uses backscatter (reflective) x-rays in the back of a truck to provide a mobile detection service that can pick out contraband in delivery trucks, explosives in cars, or anything other kind of mobile hidden danger. This is patented technology and there seems to be significant demand -- they've sold about 80 of them to the US government already, according to some reports, and they announce new sales overseas with some regularity. Their website has some great examples of the high-quality images their scanners produce, and it takes very little imagination to picture a world where these products are everyday tools of the military, customs, and law enforcement.

The company has recovered well under new management. There's a good Business Week article on that entitled "American Science and Engineering: Its X-Ray Vision Uncovers the Naked Truth". The company is clearly a beneficiary of concerns over port, airport and facility security in the wake of September 11 . But the fact that they rely largely on government sales of high-cost items (the vans, which are far from their most expensive product, run about a million dollars each) means that their earnings will be extremely lumpy, and that the orgy of post-9/11 spending might make upcoming earnings comparisons appear weak.

I'm starting to think that we're now at a point that these fears of lumpy earnings or declining growth might be presenting us with a solid buy-in point. The shares are running about $53 right now, smack inbetween their lows of last summer and their highs of the winter, before a disappointing quarter dropped the price. A Boston Globe columnist wrote recently that "it's hard to see demand for the company's products diminishing over time," and that argument is pretty compelling for me (the same column also mentioned Akamai, FYI, another big Boston-area tech company with a high-performing stock).

For other information, look to the Fool, which covers this company pretty well, including a nice summary last month that introduced some concerns over competition in their non-backscatter markets and a review of the possible reasons for ASEI's large short position, or check out the piece by former wrestler turned stock commentator JBL over at TheStreet.com if you want a much more optimistic take (his forward earnings estimates are a lot higher than I'd use). The company is not very closely followed by analysts and they don't provide guidance.

ASEI is pretty reliant on their ZBV product at this point, but they also have a lot of initiatives underway that might bring in significantly higher sales. They have a Gemini system for package scanning, a SmartCheck system that could potentially replace airport metal detectors (it shows what's under or in your clothing, and they're implementing algorithms that prevent really "private" parts from showing), a huge Omniview gantry system for scanning cargo containers at ports, and several complementary technologies that can scan even very dense and thick items (like cargo containers) to detect radiation simultaneously with a visual x-ray scan. Orders of the big gantries, or a positive TSA evaluation, and widespread adoption of the SmartCheck system, could both move the needle significantly.

Not to be a pessimist, but I think port security, battlefield scanning, car bomb detection, package scanning, and person scanning are all growth industries. And the company that can provide those services without crossing the line of interfering too much with personal privacy or impeding the flow of goods and services (these scans are fairly quick, and can largely be done in-line with regular processing, like containers being offloaded from a ship or trucks going through checkpoints for big stuff, or normal passenger and baggage screening at airports, and I get the impression that it doesn't introduce a bottleneck).

I'm guessing that international commitment to security screening in general is going to become greater, not smaller. ASEI, while priced for average growth at a PE of 16, looks to me like it should have significant opportunities to grow much of its earnings much more quickly than that over a multi-year period It's just that quarterly earnings might also drop on occasion thanks to government largesse or delays. I'll let you know if I decide to dip my toe in the water.

ASEI 1-yr chart:

Source: American Science and Engineering: X-Ray Vision Minus the Cape and Tights (ASEI)