Competition. Pfft!
Cornerstone to our capitalist economy it might be, but as an investor, I much prefer to own stock in firms with little or no competition. I love it when just a couple of players get together to essentially carve up a market between 'em: General Dynamics and Northrop Grumman in submarines, Lockheed Martin (NYSE:LMT) and Boeing (NYSE:BA) in satellites, and Airbus and Boeing in commercial airliners. However, the best situation is when a company literally does not have to compete for its revenues at all.
Speaking of which ...
This was recently the case with Motley Fool Rule Breakers pick American Science & Engineering (NASDAQ:ASEI). Three months ago, AS&E received word that the Pentagon was considering awarding it a "sole source" contract for the production of "ruggedized" Z-Backscatter Vans -- a product made by AS&E, and only AS&E. (Sole source means AS&E would not need to compete with any of its traditional rivals in fixed-location security scanning, such as General Electric (NYSE:GE), OSI Systems (NASDAQ:OSIS), or L-3 (NYSE:LLL)). Last week, the military confirmed its decision, awarding AS&E the whole contract -- a massive $67 million order for a "significant quantity" of the trailers.
What's it mean to AS&E, and to you, the individual investor? In addition to the intangible bragging rights, and confirmation of AS&E's competitive advantage in this space, it means concrete profits. While a contract of that size might not move the revenue needle for large competitors in the security space, such as SAIC (NYSE:SAI), $67 million works out to roughly 4.5 months' worth of revenues to AS&E.
Even better, these are high-margin revenues. Management doesn't break out margins by product, so we can't be certain as to exactly how high. But a few quarters back, CEO Anthony Fabiano blamed a decline in gross margins on lagging "ZBV revenue." His solution to improving profits? "We have got to do more to put our margins inline with our newer products and of course we have got to book more ZBVs."
Mission accomplished
And congratulations are in order. Still, as an AS&E shareholder myself, I will be very interested to see just how high profit margins soar as AS&E reaps these windfall revenues. The stock's looking awfully pricey at a P/E north of 42. I wouldn't mind seeing the "E" in that equation grow a bit to justify the "P".
Further Foolish musings on AS&E are available in:
- American Science Takes Its Lumps …
- American Science & Engineering Grows a Tail
- American Science & Wow!
And for even more in-depth analysis, pick up a free trial of Motley Fool Rule Breakers on your way out the door, and find out why we recommended this stock in the first place.
