American Science and Engineering Offers Security at a Reasonable Price (ASEI)

| About: American Science (ASEI)

I've been on jury duty most of the week and not watching the intraday gyrations of the market, so apologies for not posting. What with Tuesday's decline and Wednesday's boom I guess I'm right about where I was the last time I wrote.

I continue to be interested in fleshing out some positions at these depressed prices, but I've gotten a little trigger shy -- otherwise, I would have bought more Chico's (NYSE:CHS) by now, perhaps more Cemex (NYSE:CX) before it ran back up, or even a little more Imax (NYSE:IMAX) -- it looks like there must be some rumors on the takeover percolating somewhere to move that one up.

But I did make a purchase this morning, getting a small entry position into American Science and Engineering (NASDAQ:ASEI) at $52 (which is also where it closed yesterday). I wrote about this company, which basically focuses on advanced scanning and x-ray technology for security, a few weeks ago when I was wondering if it was finally cheap enough to buy. Today, I think it is.

ASEI sells a variety of products -- their biggest moneymaker right now is the Z-Backscatter Van [ZBV], a mobile x-ray scanning van that can scan the cars parked on the street, or people walking by, or other difficult-to-scan items. Governments around the world are picking these up, and the US government has been a major customer.

But they also offer other systems and larger scanning platforms. They have gantry-size scanners for cargo containers that can do x-ray scanning as well as pick up radiation; they have a proposed personal scanner for airports that would replace metal detectors with something that can actually see through your clothing (with basic privacy protected) and scanners to inspect packages or luggage.

The company is certainly reliant on government contracts -- the US government is their biggest customer, and part of the reason for the recent decline in the stock price is the fear that the market for the ZBVs has been saturated here at home.

I don't know whether that's the case, but I don't expect it is. With facility and port security increasingly big issues, and border security growing in importance (these scanners can also detect a group of people hiding in a cargo truck, for example), I don't think demand will drop. And the upside could be quite significant -- if ASEI gets a contract to put large numbers of its personal or package scanners in US airports or post offices, for example, the market would be huge.

As you can see from the headlines, security remains a critical issue around the world -- ASEI should be in a pretty good spot to supply some abilities that very few police or security agencies have right now, and I think that's a very good bet.

There is certainly a flip side to this argument -- as of mid-June, when the price was just a few dollars higher then where it is now, there was a large short position in ASEI (20% of the float). I think that's too much pessimism for a company with unique products, in a growing industry, with virtually no debt and a below-average PE ratio. But I'm just one guy, and the short sellers often have better information than I do.

I'll plan to watch this one closely over the next few months and see if I get an opportunity to fill out my position at better prices, or if order flow picks up and a higher price is warranted. Whichever way it moves, the shares I picked up today at $52 seem to be very reasonably priced.

ASEI 1-yr chart