Recent headlines have reminded us too well of the growing need for protection from terror groups and cybercrimes.
More than 32,000 people were killed in acts of terrorism in 2014, an increase of 80% from 2013. The economic impact of terrorism also reached a record $52.9 billion last year, surging 60% from the previous year and jumping ten-fold since 2000.
Cybercrimes and headlines of major hacking breaches have become regular occurrences, with more than 4,000 cyber-attacks reported every day. IBM estimates that businesses are attacked an average of 16,856 times a year. That's every business. While the majority of online attacks don't get through first-line defenses, an average of 1.7 per week are successful at breeching corporate networks.
Growth in security products, services and cybersecurity is set to be a pervasive theme for the foreseeable future.
An industry report from ASIS International shows private security spending jumped 10.5% to $377 billion over the two years through 2015. That estimate is likely conservative, given that corporate security spending isn't often separated out from general facilities management budgets. The global market for physical security grew to $120 billion in 2013, an increase of 11% from the previous year.
Cyber security continues to be the fastest growing segment of the security market. It is estimated to more than double from $75 billion this year to $170 billion by 2020. According to Lloyd's of London, cybercrime costs businesses up to $400 billion annually. Aerospace, defense and corporate spending continue to account for the majority of cybersecurity spending and support a 9.8% annualized growth rate.
Four Stocks Set To Profit From These Trends
CyberArk Software (Nasdaq: CYBR) operates at the corporate level and focuses on protecting privileged accounts management (PAM) within an organization's IT hierarchy. The smaller $1.2 billion player has carved a niche for itself in PAM protection, a key to the hacker threat cycle for accessing IT infrastructure once perimeter defenses have been breached.
Private accounts within a network are the Holy Grail for hackers because they hold special access to restricted areas and valuable information. Stopping these attacks is a corporate priority and CyberArk has built a strong base of intellectual property around the niche, something that could make it an acquisition target for larger security providers. Revenue has grown at a 41% annualized rate over the three years through 2014 to $103 million and the company forecasts significant growth in a $10 billion addressable market.
AVG Technologies (NYSE: AVG) is my favorite buy-what-you-love stock. I've used the company's security software and performance optimization products for years and have avoided attacks that snagged others. The company's "freemium" model works very well, luring customers in with a free service level and then upgrading to paid packages.
Subscription revenue was up 26% annually to the 3rd quarter and the company operates at an attractive 29% operating margin. AVG operates mostly at the consumer level with desktop, mobile and search products accounting for 85% of revenue but has a faster-growing small business segment driven by its recent Norman acquisition. Nearly half (47%) of American adults had their personal information stolen by hackers last year, fueling growth of the retail consumer market.
Tyco International (NYSE: TYC) is the global leader in a fragmented electronic security and fire suppression market at $10.3 billion in 2014 revenue. A quarter of that revenue is from recurring services contracts with a strong presence in Europe (24% of sales) and North America (53% of sales). Tyco holds 9% of its estimated addressable market, more than double the next largest competitor with just 4% of the market.
There are other pure-play companies in the security space but I like Tyco for its size in a fragmented market of small and mid-cap options. Security installations and monitoring account for 55% of revenue and the company can use its service diversification across both fire and security to bundle services and attract customers.
FLIR Systems (Nasdaq: FLIR) designs electronic solutions for the security market. The company holds 4% of its estimated $36.3 billion addressable market across six different applications including surveillance, detection and security. The company has booked five-year annualized revenue growth of 21% in the United States and 8% annualized in Europe.
Expense management drove a 3% improvement in profitability to a 15% net margin in 2014. FLIR markets to the government and commercial market and sits on an impressive 1,374 patents with an annualized 19% growth in patents owned over the five years to 2014. While sales to the government have been weak over the last year, an increase in terror attacks may boost orders.
Risks to Consider: The market for security products and services is extremely fragmented and competitive. Diversify your position across several companies to benefit from overall growth in the theme and reduce company-specific risks.
Action to Take: Position your portfolio for the evolving theme of insecurity and terror attacks on a global-level. Add names across the security theme in physical products and services as well as cybersecurity.
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