Nagging doubts

Follow the gyrations of Viisage Technology Inc. stock over time and you will lose all faith in the concept of an efficient market that absorbs information and reacts appropriately.

Viisage is a little firm, just a face in the stock market crowd, but its business is often lumped into the general category of homeland defense and antiterror investments. Put a small stock in an emotionally charged environment, and you would be advised to fasten your seat belt.

Shares of the Littleton firm, which works with facial recognition and other biometric technology, spiked from below $2 to $15.97 in less than a month in September 2001 but deflated slowly over the next 10 months. Viisage stock had gone through a similar boom and slump cycle two years earlier. The same shares tripled over the first four months of this year, but have slipped from $13.25 to $7.54 since. The practical question of the moment: Would you buy Viisage stock now? The company expects to offer as many as 7.5 million new shares this quarter, a deal that will increase its outstanding stock by about 20 percent and boost the float of shares that are actually available to trade by 25 percent.

There are reasons to believe Viisage is in a better position to become a profitable leader in an important technology niche. Two key acquisitions in the last six months have dramatically improved the company's outlook.

But the price to buy into that potential is dear. Viisage isn't making money at the moment, and hasn't earned a profit for the past two years. The company's stock trades for about six times revenue, even after its decline of recent months, and should be valued at about seven times sales when the new shares are added to the market.

''The valuation implies they will continue to grow rapidly and expand margins, so there is a lot of good news factored into the stock at this point," says analyst Tim Quillin of Stephens Inc. ''Until we see more evidence, I would view it as a little too expensive." He gives Viisage stock a neutral ''equal weight" rating.

Viisage might sound like a young up-and-comer, but the company has been around for more than a decade. Created as the electronic imaging unit of Lau Technologies, Viisage was spun off in an initial public offering in 1996.

The company's basic business built digital imaging into credentials and documents such as drivers licenses issued by states. Viisage took its first step into the world of biometrics in 1999 when it tested facial recognition technology for police surveillance.

The hype over that kind of technology, developed by Viisage and many other companies, grew over time. Could it spot the terrorist in the Super Bowl crowd?

No it couldn't, as we learned. Facial recognition as a surveillance tool didn't work well enough and it raised troubling social issues. But that doesn't mean it was a bust. Now Viisage hopes to use facial recognition and other biometrics as a way to produce better identification documents, a more practical application with plenty of potential customers. Swipe a passport through a scanner and let a computer with facial recognition software compare the face of the bearer with a stored image.

The company still makes the equipment to create driver's licenses in many states, in addition to hardware and software to produce other government and corporate identification. In February, the company acquired Trans Digital Technologies Corp. and its security technology used by the US government for passport verification. Another big plus: Viisage bought a small German company with substantially better facial recognition technology in January.

''I think they're extremely well positioned," says Scott Greiper of CE Unterberg Towbin. ''Being there, having worked with governments on security, is the way to get more business." The pitch for Viisage boils down to the opportunity to build on a broader base of customers and products with better technology. It would be easier to buy if Viisage had a better track record of doing the most with all its potential.

Steven Syre is a Globe columnist. He can be reached at syre@globe.com.