TOP TEN
1.  A N A L O G I C   C O R P.

Rich Tate, senior electronic technician for Analogic, sits at the computer tomography work station. (Globe Staff Photo / Pat Greenhouse)

Analogic's new flight path

Aviation security business takes medical imaging device maker's growth from steady to sky-high

Keith Reed, Globe Staff, 05/20/03

1. Analogic Corp. 2. State Street Corp. 3. BJ's Wholesale Club 4. Charles River Labs 5. Yankee Candle 6. Staples 7. Gillette 8. TJX Cos. 9. Kronos 10. Investors Fin. Svcs.    The 2003 Globe 100    All the charts

t isn't a bad time to jump into the aviation security business -- particularly if the business you run is in a slow-growth industry.

Ask Bernard M. Gordon, founder, chairman, and CEO of Analogic Corp. (ALOG), a Peabody company that makes medical imaging equipment.

Analogic, a venerable firm that manufactures hundreds of costly CT scanning and mammography machines each year, had never had an unprofitable quarter in its nearly 30 years of being publicly traded. But it lacked the explosive growth seen by some other tech firms in the Route 128 corridor.

In 2000, though, Gordon got a phone call from Lockheed Martin's L-3 aviation security spinoff. Lockheed was 10 days from a deadline to propose a new kind of baggage-screening machine for the government when its partner bailed out. So Analogic joined forces with Lockheed, and they won the contract.

"There wasn't much interest at first," Gordon said. "For a moment, it appeared to be disappointing. Now comes 9/11, and suddenly everybody's interested in keeping people with bombs off airplanes." The call from Lockheed was a harbinger of incredible good fortune for Analogic, which has since cultivated its aviation security manufacturing as the driving force behind its growth.

The company's revenues climbed to $153.4 million in its fiscal second quarter this year, which ended Jan. 31, from $66.4 million in the same quarter last year. For the same period, net income jumped to $21.2 million, or $1.59 per share, from $605,000, or 5 cents per share.

And Analogic appears determined to keep the momentum going: In March, the company appointed a new president, John Wood, as Gordon's heir apparent. It is also expanding its headquarters and has a contract to build 500 more baggage-screening machines. Analogic is also considered by some to be the leading candidate to produce a new antimissile defense system for all US passenger jets. It is also the Globe's Company of the Year, having jumped from number 93 last year to number one this year.

"They're in the right place at the right time," said Edwin J. Fowler, an analyst at GunnAllen Financial in Killington, Vt. "Their bomb-scanning equipment is in the process of doubling the size of the company."

Now, Analogic must capitalize on the growth opportunities that have boosted it over the past three years. Analysts say the company's stock is undervalued by as much as $30, and that it could even be an attractive acquisition target.

The current share price, at about $50, is at least $18 too low, said Dalton Chandler, an equity analyst at Needham Co. in New York. Fowler went further, setting a target price of about $80. Perhaps the company's best chance to continue its stellar growth is an effort to develop a missile defense system for commercial jets -- a joint project with Sanders Design International of Wilton, N.H.

The so-called infrared countermeasures (ICRM) system would protect jets from shoulder-fired, heat-seeking missiles that could destroy planes on takeoff or landing when fired from a range of about one mile.

A measure introduced in the US Senate in February would mandate federal funding to equip all 6,800 passenger jets in the country with the systems, at an estimated cost of between $7 billion and $10 billion. If the bill passes, that work would have to begin before the end of the year. Gordon would not discuss specifics but said the system would require extensive -- and dangerous -- testing.

"The object is to have the missile dodge the plane, rather than to have the plane dodge the missile," he said. "Testing something like this is a complicated matter. You actually have to fire a missile at a plane."

The company's research and development staff, its intellectual property catalog, and its low stock price and growth opportunities could make it an attractive buy for a company such as GE Medical Systems, which does an even larger business in scanning equipment than Analogic, Fowler said.

But, "Nothing will happen until Mr. Gordon is gone, as he is the sole emperor at the University of Analogic," Fowler said. "I am thinking about the long term and someday, perhaps with Mr. John Wood, Analogic will do different things."

Although Wood has been president since March, Gordon remains chairman and CEO, and no date for Gordon's retirement has been set.

Wood dismissed talk about the company becoming an acquisition target, saying Analogic's $183.3 million cash reserve positions it to grow by buying other firms, not by being bought.

Its aviation security products have drawn the most attention but Gordon said Analogic's future lies solidly in medical imaging.

Analogic is currently developing digital radiography equipment that can produce enhanced images that could replace X-Ray and mammography equipment.

"Security is a solid business, and people are right to talk about it," Chandler said. "At the same time, they shouldn't forget about the medical technology business. That's where the technology for the security came from."

Keith Reed can be reached at reed@globe.com.

Search the Globe  Search for:   Today Yesterday Past month Past year   Advanced Search © Copyright 2003 New York Times Company | Advertise | Contact us | Privacy policy |