Investment Trends With...

Mr. Michael French
Vice President
Equity Research
Homeland Security and Defense
Kaufman Brothers L.P.

SecurityStockWatch.com: Michael, thank you for joining us today. Please give our audience an overview of your background and your role at Kaufman Bros., L.P.

Michael French: I was literally born into the defense world when I arrived at the Bethesda Naval Hospital. My father was in Vietnam and after serving there he worked for defense contractors. After a brief stint in the Navy myself, I started my industry career in Washington writing about satellites. I moved to New York in 1998 to broaden the satellite research coverage at an investment bank. I continued covering satellite industry at various firms until 2002 when I worked as a generalist buy side analyst. In 2004 in decided to return to the sell side and was able to convince Craig and Robert Kaufman that defense and homeland security technology would be a great complement to the technology investment banking platform they had built. Given my many years of living in Washington and studying government and military science, I knew that this war on terror was going to last decades and require significant new investments. We have developed a roster of companies that we believe will benefit from these changes. In particular, we like companies that help gather, analyze and disseminate information. We also favor companies with good force protection capabilities, whether electronics or armor.

SecurityStockWatch.com: Which companies are you covering in the security space at the present time. Can we have a brief thumbnail on each?

Michael French: RAE Systems manufactures chemical and radiation detection equipment. They were the first to customize what had been industrial tools for homeland security application

Ultralife Batteries manufactures long life batteries that the military uses to power radios, night vision equipment, and many other sophisticated electronic devices that are a growing part of today?s battlefield.

Essex Corp. has a variety of sophisticated optical and signal processing technologies. They run some of the most advanced programs utilized by the intelligence community to track potential threats.

Ceradyne is the leading provider of body armor to the U.S. military. It is also attempting to sell more advanced composite materials to the military for vehicle applications.

Axsys Technologies manufactures high-end lenses and camera assemblies for a variety of applications. Boeing is considering their long range night vision products for inclusion in the Secure Border Initiative Network.

EDO Corp. is a defense electronics company that manufactures everything from sonar equipment to devices that jam insurgents' roadside bombs.

Orbital Sciences is a space technology company. They are the sole-source provider of interceptors for the ground based missile defense. Orbital also has civil and commercial lines of business in satellites and rockets.

United Industrial Corp. is the only provider of tactical unmanned aerial vehicles to the U.S. Army. These UAVs have been very effective at identifying enemy positions and activities. The company has been expanding its aviation services business via acquisition.

Digital Angel provides rescue radios to the military and has RFID technology to maintain food supply safety in the U.S. and other countries.

Applied Digital Solutions is the parent of Digital Angel and Verichip, the human implantable microchip that is expected to be utilized for security and medical applications.

DRS Technologies manufactures ruggedized laptop displays, night vision equipment, sensors and a variety of other products that enable U.S. forces to detect and target enemy threats. It also has a significant logistics business it acquired this year. Part of the plan with that is to pursue new homeland security applications such as disaster recovery operations or the provision of post-incident services such as water and telecommunications.

SecurityStockWatch.com: What is your perspective on the market drivers for these companies at the present time?

Michael French: The main market driver is the threat environment, and unfortunately for the citizens and taxpayers, that shows no sign of improving soon. Congress will continue to increase appropriations for the capabilities needed to detect and thwart attacks for the foreseeable future, in my opinion.

SecurityStockWatch.com: We're 5 years post 911 and yet we are still very vulnerable to all sorts of attacks: in mass transit, at the ports, and in every kind of public venue. Are things getting better or getting worse? Can you give us an overview of the Federal programs and mandates that are underway to improve our security?

Michael French: There are literally dozens of federal programs, and state and local programs on top of those. After an initial period of shock, then reorganization, I think the homeland security apparatus in this country is focusing on and investing in the right priorities. We are starting to see SBInet being implemented, US-VISIT is ramping up, and other programs that enhance security are being funded.

SecurityStockWatch.com: Do you see some sectors of the security market growing faster than others?

Michael French: Yes, like I said earlier, I believe that the information gap is where America needs to focus its resources. The gap is the delta between the information our forces have and the data they need. Whether it's establishing a traveler's identity or finding a roadside bomb, fighting a war against a network of terrorist organizations will require significant improvement to our intelligence capabilities.

SecurityStockWatch.com: Michael, many thanks for your time today. Are there any other comments you would like to make?

Michael French: Thank you for the opportunity to address your audience. I would just like to add that I am very pleased to be covering this sector. Not only is it a good place to find attractive investments, many of these companies are literally saving lives and protecting democracy on a daily basis.