Fending off Cyber Threats with RuggedCom

| About: Ruggedcom Inc (RUGGF)

I wonder how many utility executives lie awake at night worrying about cyberthreats to their electricity substations.

If you’ve ever gone a few days without electricity in your home, you’ll quickly realize how minimal life becomes. Working on your computer—the speedway to higher thinking and creativity— is impossible.

Watching television, charging your cell phone, keeping food frozen, and micro-waving popcorn, can no longer be done. Every task requires planning and, much more physical labor—consider what it would take to wash and dry your laundry. Without electricity, all business and governmental systems would stop cold. Imagine a world without money transactions. Payrolls couldn’t be met, loans would languish, and interest accruals couldn't be calculated. This is the stuff of a great Hollywood thriller.

But for RuggedCom, Inc., (OTC:RUGGF) a manufacturer of ruggedized communications equipment for utility substations, it is a serious reality. The company’s products are designed for the smart grid, with interconnectivity options and security features necessary for regulatory compliance. Utility customers are able to prevent accidental or malicious service disruptions by establishing an electronic security perimeter with its routers and switches around critical infrastructure.

RuggedCom designs its routers, switches, serial servers, and media converters to withstand extreme weather conditions such as heat waves and the negative effects of natural phenomenon like lighting strikes. The products are also immune to radio and electro magnetic interference.

In March a major US utility company agreed to purchase $2 million worth of RuggedSwitch and RuggedRouter products for about 300 substations over the next four years. The units will be used to create secure communications networks for use in substation automation and smart grid applications, according to a company press release, dated March 17. The document did not disclose the name or location of the utility company.

A router is a high-speed highway for transporting packets of information among a network of computers, and a switch acts as a bridge between the highway segments. Similar to the Internet, the smart grid is designed to isolate disruptions and prevent cascading events.

So far, RuggedCom has lassoed 40 percent of the worldwide substation market, according to Manish Grigo, research analyst at Toll Cross Securities, Inc., in Toronto, because the hardware is outperforming that of its competitors. He recommended the company’s stock as a buy.

RuggedCom of Woodbridge, Ontario, competes with Cisco Systems (NASDAQ:CSCO), Inc., of San Jose, Calif., and GarrettCom, Inc., of Freemont, Calif., among others.

The company’s fundamentals are strong, said Grigo, even though share price has fluctuated lately. Over the past 52 weeks, share price soared to $26.29 from $8.87, according to Bloomberg—an 86 percent return.

“I would expect some lumpiness along the way,” Grigo said. “But if someone is in it for the long-term, you definitely will benefit from this stock.”

Utility companies test equipment extensively before making a purchase, he said, and typically stagger their purchases over several years. Therefore, once a company settles on a supplier, utility officials will likely continue to buy from it.

“They don’t upgrade their entire network all at once," he said. “They do it over 5 and ten year periods, so they will be customers for the long haul.” Company officials will announce fiscal 2010 second quarter results, ending September 30, today. (Nov. 5) At the end of its first fiscal quarter on June 30, profits were up 26 percent from the comparable quarter a year earlier and net income was $0.9 million, representing the seventeenth consecutive quarter of profitability, according to a company announcement.

“Customers are spending millions on RuggedCom’s technology,” Grigo said. “To me that speaks volumes about their product.”

Disclosure: Long CSCO