In April, 2006 I began to develop my investment thesis for American Science and Engineering (NASDAQ:ASEI). In the preceding weeks, the news had been dominated by the Iranian nuclear situation, including their announcement that they had started to enrich uranium and their repeated threats to wipe the state of Israel off the map. A few months later, in August, 2006, all the attention was focused on liquid explosives as a result of the foiled plot to bring down numerous British airliners. However, I believed then and still believe today that the nuclear threat is far more serious. Iran has ignored various UN resolutions that they cease the development of nuclear weapons, and there is little doubt today that they are moving full steam ahead toward the acquisition of these weapons. From the moment they attain such weapons, the United States will have to face the fact that it is totally unprepared for the screening which will be necessary to prevent the unthinkable, and this is an area where ASEI has a lot to offer.
Iran is working to acquire nuclear weapons and will do so unless stopped by force. The big unknown is whether the Western powers will acquiesce to the possession of nuclear weapons by Iran or not. A year ago I had no idea, although I did think at the time that it was slightly more likely that the West would find some diplomatic formula for “peace in our time” which would prevent it from having to employ force and which at the same time would result in a nuclear-armed Iran.
Let us first consider what will happen if Iran obtains the bomb. On the day they make their first successful nuclear detonation, either in the form of a test or an attack on Israel, the United States will be turned upside down with fear and insecurity. Given Iran's status as the world's leading state sponsor of terror and its active and long-standing support of terrorist organizations, we will face the very real possibility of a nuclear weapon making its way inside our borders. This will no longer be the kind of theoretical threat it was in the past. Once we know that Iran actually has the bomb, the prospect of it being delivered by a terrorist group in the United States becomes real and tangible. Every container entering a U.S. port will be seen as a threat. Every truck crossing the Canadian or Mexican border will be seen as a threat. At that point we will have no choice but to screen, and screen, and screen.
ASEI has a well-developed technology for radioactive threat detection [RTD] which it is able to deploy in the screening of both cargo and vehicles. Furthermore, this equipment functions in a manner which does not unduly disrupt the flow of commerce. At present, we screen very few containers entering our ports and very few trucks crossing our borders. The demand for RTD screening equipment will be enormous and the potential market is almost limitless.
What about the other scenario in which Iran does not obtain nuclear weapons? If I'm right, then the only way this will happen is via a preemptive attack on Iran. Such an attack would most likely retard Iran's progress in becoming a nuclear power, but it will unleash major conflicts in the broader Middle East and a sustained terror war against the U.S. and its interests. There have been many reports in the news of Iran making preparations for a sustained terror campaign against the U.S. in the event they are attacked. Once again, we will need to screen like we never have before, both for dirty bombs and conventional explosives. ASEI has precisely the technology for detecting such threats, either in vehicles or in cargo. The demand for this technology will skyrocket.
The considerations outlined above still reflect my fundamental long-term investment thesis in this company. However, recent developments and continued reflection on them have now brought me to the point where in addition to the long-term thesis, I believe there is a now a sense of urgency which has the potential to change the landscape for ASEI in a relatively short period of time.
There is a fascinating article by Norman Podhoretz in the June, 2007 issue of Commentary Magazine in which he discusses the question of whether or not the U.S. intends to bomb Iranian nuclear facilities in order to prevent the acquisition of these weapons by Iran. It is an interesting piece which I won’t try to summarize here, but there a couple of points he makes near the end which I find hard to dismiss.
Podhoretz points out that the bombing of Iranian nuclear facilities by the U.S. will likely lead to retaliation by Iran in the form of a massive terror war against us, and he then attempts to address the question of how likely it is that the U.S. will in fact bomb Iran. When I thought about this a year ago, I was not convinced one way or the other, and, while I still lack any kind of certainty, I am now beginning to feel, as a result of this article, that one outcome is starting to look more likely than the other.
Podhoretz considers a number of statements made by President Bush and observes that:
Indeed, he [Bush] has gone so far as to say that if we permit Iran to build a nuclear arsenal, people 50 years from now will look back and wonder how we of this generation could have allowed such a thing to happen, and they will rightly judge us as harshly as we today judge the British and the French for what they did and what they failed to do at Munich in 1938. I find it hard to understand why George W. Bush would have put himself so squarely in the dock of history on this issue if he were resigned to leaving office with Iran in possession of nuclear weapons, or with the ability to build them. Accordingly, my guess is that he intends, within the next 21 months, to order air strikes against the Iranian nuclear facilities from the three U.S. aircraft carriers already sitting nearby.
I think Podhoretz makes a convincing case that it is more likely than not that the U.S. will in fact initiate, in the near term, a bombing campaign against Iranian nuclear installations. The consequences of this will not be pretty. U.S. interests both at home and abroad will be the target of relentless terror attacks. The need to screen vehicles and cargo for dirty bombs and conventional explosives will be enormous and there will be unprecedented demand for ASEI’s products.
Disclosure: Author has a long position in ASEI
ASEI 1-yr chart