One of the biggest threats our country—and we as citizens—face today is cyber warfare. This silent battle rages every minute of every day in cyber space.
In 2012, there were nearly 200 cyber-attacks against the control systems of our critical infrastructure facilities. That includes our power plants, refineries, transportation systems and water treatment facilities. That was a nearly five-fold increase from the number of attacks carried out in 2010.
Imagine a terrorist cyber-attack taking down the power supply in New York, Boston, Philadelphia, or the entire Northeast. Such an attack could lead to disruptions on par with the Northeast Blackout of 2003, which took down thousands of businesses and cost our nation more than $6 billion. But terrorists are interested in much more if they could get it, like gaining control of a nuclear facility or our water supply, or taking down our entire financial system.
Top U.S. officials warn that the cyber threat is growing by leaps and bounds. Indeed, intelligence officials have even indicated that other nations and transnational organizations could soon have the cyber capabilities to disrupt or damage vital elements of our critical infrastructure.
“The threat from cyber attacks will equal or surpass the threat from terrorism in the very near future,” FBI Director Robert Mueller has said. Secretary of Defense Leon Panetta has stated, “There is a strong likelihood that the next Pearl Harbor we confront could very well be a cyber attack.” And Congressman Mike Rogers, Chairman of the House Intelligence Committee, has said, “We will suffer a catastrophic cyber attack; the clock is ticking.”
Online security vendor Symantec has just reported a whopping 81% increase in malicious cyber attacks in 2011 alone. They have identified 403 million unique types of malware (malicious software), and reports indicate that the number of blocked Web attacks skyrocketed 36% just last year.
That’s why governments and companies around the globe are spending billions of dollars in a frantic race to ward off an explosion of cyber attacks. The U.S. government has spent over $600 billion dollars on information technology over the last decade and a huge—and rapidly expanding—portion of those billions are being dedicated to cyber defense. U.S. corporations spent over $5 billion dollars on cyber security, and that amount is sure to increase. Throw in spending by foreign corporations and governments, and all told, the global cyber security market will be one of the fast-growing markets on the planet, projected to reach $80 billion in the next five years.
And I think that’s conservative.
As investors, we must have cyber security on our radar as a key sector in which to look for game-changing opportunities in companies and technologies at the absolute forefront of the new cyber wars. Let me tell you about some at the top of my list right now.
Defense Stock #1: AeroVironment (AVAV)
AeroVironment (AVAV) is one of the leaders in unmanned aircraft systems. The company has a storied history of game-changing innovation going back to its founder, Dr. Paul MacCready. He started AeroVironment in 1971 and gained fame six years later when his “Gossamer Condor” became the first human-powered aircraft to complete a sustained, controlled flight. It was driven by the pedal power of an amateur cyclist and wind surfer. That led to the development of the Gossamer Albatross, another human-powered aircraft that flew all the way across the English Channel.
Dr. MacCready died in 2007, but the company he started has remained true to his vision. Unmanned aircraft systems make up the bulk of revenues, about 85%, led by three models: the Raven B, Wasp and Puma AE. The Raven B is an enhanced version of an earlier system that is used for low-flying surveillance in the day or at night. It can be operated manually by remote control or programmed to fly by itself using its advanced avionics system. It weighs just 4.2 pounds, has a wing span of 4.5 feet, and has a line-of-sight range of 10 kilometers (6.2 miles).
Interesting recent products or those still in development include the full airplane-sized Global Observer, a high-altitude (65,000 feet) and long-lasting (one week) vehicle that can help governments track and respond to problems such as drug trafficking and terrorist activity. There is also the small public safety unmanned aircraft called the Qube, which police departments can use for jobs such as finding suspects and missing persons. This could have big potential as the doors open for more widespread use of UASs among local law enforcement agencies. And there is also the Nano Hummingbird, which has the size – and look! – of a hummingbird. It can fly up to 12 minutes and is expected to excel in tight quarters, such as urban reconnaissance operations. (Sounds like a scene from a James Bond movie with Q briefing Bond on the cool hummingbird spy camera he can use on his next mission.)
Not to be overlooked is AeroVironment’s other business: Efficient Energy Systems (EES). It’s smaller than the UAS business, accounting for the remaining 15% of revenues, but it’s a game changer as well with exciting growth potential. This division primarily manufactures “refueling” systems for both fleet and electric vehicles. The technology’s roots go all the way back to the company’s creation of the GE Impact 25 years ago. This business offers various chargers – including overnight home chargers, public chargers, fast public charges, and installation services. The fast public chargers, which can juice up a car in an amazing 10 minutes, may be a key in making electric vehicles a more viable alternative.
Also interesting is the company’s PosiCharge division, which charges industrial batteries during the time machines are down for regularly scheduled maintenance. This is much cheaper than replacing batteries, and the company says customers get a complete return on their investment in the system in just 12 months. Another division of the EES business is test systems for electric car manufacturers.
I should also mention that AeroVironment has the makings of an acquisition target. I haven’t heard any specific rumors as of yet, but it would be natural for defense contractors to consolidate as total federal outlays shrink, and the company is in an exciting growth area. AVAV is also small enough to be easily integrated into a larger contractor.
Defense Stock #2: Sourcefire (FIRE)
Sourcefire (FIRE) develops “intrusion detection” hardware, software and cloud-based network-security products and services for businesses and government agencies. These products and services are to help customers before, during and after an attack.
The company was founded in 2001 by Martin Roesch, who developed Snort, the most widely used intrusion detection and prevention technology. Snort is an open-source platform, and Roesch developed a commercial version of it for Sourcefire.
Sourcefire has a virtual arsenal of advanced technologies designed to thwart malware attacks. The company has developed a cutting-edge technology that uses cloud-based computing systems to look across millions of computing machines simultaneously to detect malware attacks in real time. They also offer “sandbox” technology to verify untested code or programs and assess their legitimacy, and FIRE recently introduced a next-generation firewall that enables them to lock down channels that malware moves around on.
The company went public in March of 2007, and the stock languished under $20 for its first two years, with much of that time under $10. FIRE now trades above $50, and was up more than 60% so far in 2012.
In 2012, Sourcefire was named the 11th fastest-growing tech company in America by Forbes magazine. Revenues for the first quarter of 2012 soared 50% to $46.3 million. International revenues increased 28%. The company earned $0.11 per share in the quarter (excluding one-time items), nearly three times the $0.04 earned in the first quarter of 2011 and ahead of expectations for $0.08. This continued a streak for FIRE, which has now beaten expectations seven straight quarters.
Defense Stock #3: Check Point (CHKP)
Check Point Software Technologies (CHKP) has been developing technology to protect Internet communications and transactions for both businesses and consumers for nearly 20 years. Check Point’s current product offerings are based on what’s called a software blade architecture introduced in February 2009. A software blade is a security building block that is independent, modular and centrally managed—allowing organizations to customize a security configuration that targets the right mix of protection and investment. A big advantage of this structure is that it allows CHKP’s customers to scale their security needs while keeping intact previous investments they made in security.
Customers can select the exact security they need from a library of over 30 software “blades” and combine them into a single, centrally-managed solution. They can also add new software blades as their needs grow without purchasing additional hardware. This gives customers the freedom to deploy security when needed while lowering the total cost of ownership – a very attractive feature that few companies offer.
Let’s take a closer look at these different kinds of blades. One of its more popular options is the firewall blade, which inspects traffic as it passes through security gateways, evaluating the traffic’s source, protocol and application used. The customer can then use this information and decide to block the site based on its security policy. Another interesting option is the Intrusion Prevention System (IPS) software blade, which is designed to be able to detect threats, both known and unknown items that appear suspicious. The IPS blade is constantly updated for the latest threats. Among the other blades offered are a virtual private network (VPN) blade, and an anti-virus and anti-malware blade.
Check Point also offers a product line of counsel appliances designed to run its software, which was refreshed earlier this year. Appliances can be small enough to fit the needs and budgets of small businesses, or large enough to cover the demands of large telecommunication companies.
To keep all of these products running smoothly CHKP has a significant support and subscription business, which accounted for nearly 60% of revenues in 2011. Revenues in this category include technical support supplied primarily via the telephone and software sold on a subscription basis as opposed to a one-time license fee. I like the fact that a majority of the company’s revenues are obtained in this manner, since it provides a recurring stream of revenues that reduces volatility in earnings, something we’re focusing on very closely in the current economic environment.
Sincerely,
