Inside Wall Street: Why Biometrics Maker Cogent Measures Up

Despite the rising threats of terrorism and identity fraud, investors have yet to gravitate strongly toward companies that specialize in biometrics. That's the practice of verifying a person's identity through unique physiological characteristics, including fingerprints, palm prints or the eye's iris. The biometrics sector is likely "to grow at a compounded annual rate of over 25% for the foreseeable future," says Harry Rady, portfolio manager at Rady Asset Management and the top-ranked Rady Long/Short Contrarian Fund.

That's one reason why Rady is very bullish on companies that provide anti-terrorism and homeland security services to the U.S. government. He thinks biometrics will be a long-term growth industry, given the growing need to combat terrorism worldwide.

Rady, who invests in what he describes as "the best of breed" companies with profitable and sustainable business models, says his top choice in the sector is Cogent (COGT). It's a leading provider of automated fingerprint-identification systems and other biometric products to governments and law-enforcement agencies, and it continues to grow significantly, says Rady. At the end of 2009, Cogent had an order backlog of $205 million, up 22% from a year ago. Its solid balance sheet, he notes, has nearly $6 a share in cash.

With that kind of cash on hand and trading at just $10 a share, Cogent is certainly undervalued and financially sturdy, says Rady. His three- to six-month price target is $14 a share. Over the next 12 to 18 months, Rady expects the stock will hit $20.

"Significant Upside Potential"

Cogent reported solid fourth-quarter results, but management provided 2010 sales and earnings forecasts that were below Wall Street's expectations. That led some analysts to dismiss the low guidance as too conservative. Management failed to take into account "significant upside potential over the coming year," says Brian W. Ruttenbur, an analyst at investment firm Morgan Keegan, who rates the stock outperform.

For one, management hasn't assigned any wins from the Defense Dept., "but we believe Cogent has potential Defense Dept. upside [in orders] with needs in Afghanistan and two key programs," says Josephine Millward, an analyst at investment firm Benchmark, who rates Cogent a buy. She also notes that Cogent is bidding on several biometrics projects that will likely be decided in the coming year in other countries, including Algeria, Chile, Israel, Indonesia and India. And she says the $26 million contract that Britain recently awarded Cogent has the potential of growing to a $100 million project.

Another big bull on Cogent is analyst Dylan Cathers of Standard & Poor's, who says his buy rating reflects his view of the company's favorable long-term growth potential.

Enticing Buyout Target?

One other important factor: Cathers believes Cogent is an attractive potential takeover candidate. He says biometrics and related markets will experience strong growth over the next few years and that Cogent is well positioned to win government contracts. As a result, he says, it will experience less cyclicality.

Cathers figures that makes Cogent an enticing buyout target in the group. He doesn't identify the likely suitors, however. The other big players in biometrics include diversified technology manufacturers such as Motorola (MOT), NEC and Safran Group. Any one of them may be interested in Cogent. So, it deserves a premium price relative to its peers, says Cathers.

Cogent is trading close to its 52-week high of $12 a share reached on Apr. 6, 2009. Its biggest shareholder is founder, chairman, president and CEO Ming Hsieh, who owns 36.9 million shares, or a 41.28% stake. Three of the largest institutional investors are Citigroup (C), which owns 3.46% of the stock; BlackRock Advisors with 3.28%; and Invesco (IVC) with 2.93%.

Evidently, these big investors believe biometrics products are central to the U.S. government's counterterrorism campaign and want a piece of the action through Cogent. It isn't too late for other investors to do the same.