CHARLES NORTON
CO-PORTFOLIO MANAGER
THE VICE FUND (VICEX)

COMPANY: American Science and Engineering
TICKER: ASEI (Nasdaq)
PRICE: $89.98 (as of 4 p.m. Friday)
52-WEEK RANGE: $35.95-$92.70
MARKET CAPITALIZATION: $735.95 million

Charles Norton is the co-portfolio manager of the Vice Fund (VICEX), a mutual fund that invests mainly in alcohol, defense, gaming, and tobacco companies. American Science and Engineering develops and manufactures X-ray inspection and other detection systems for a range of security and defense applications. Mr. Norton spoke to David Dalley of The New York Sun and discussed why he believes ASEI is a good investment.

What does ASEI do?

They make sophisticated X-ray inspections systems for detecting terrorist explosives and smuggled goods like illegal drugs. Among their clients are various governments and government agencies.

Why do you like it?

Port security is all over the news these days. With the United Arab Emirates deal, etc., port security is in the limelight. ASEI has a scanning system that’s being used to search cargo containers for contraband or threatening materials, and demand for that technology will continue to be strong. Of all containers coming into America, only a small fraction are every actually opened. ASEI’s product can scan these containers and determine right away whether there is something that warrants detection.

Their latest product is called OmniView. They just got a pretty big contract for it from, ironically, an Arab country. It was just released in the fall, and the Department of Defense placed the first order.

Their main product is what’s known as the ‘Z Backscatter Van.’ That’s a big product in border security, and it’s being used right now in Iraq to secure the borders and make sure insurgents aren’t crossing over. It’s basically an x-ray machine put into a traditional van, so it’s mobile.

What will drive growth going forward?

They have in development a next generation passenger-screening product called SmartCheck which could one day replace the standard metal detectors in airports. It’s a very exciting technology. It allows the operator to detect if a person has weapons or explosives by peering below clothing which is being considered by the TSA.

They also just recently signed a marketing and distribution agreement covering China. That’s hugely important. With the Beijing Olympics in 2008 there is an increased focus on security, and a deal in China would be very lucrative.

I think that the growth going forward could be tremendous. This company is in the sweet spot of a lot of different important markets. Homeland security is obviously a big thing; port security and border security are also two very big markets. And the China deal is huge. There is a lot of potential here.

What are the fundamentals like?

This company is experiencing massive growth. The stock is at around $92 right now. They earned 26 cents in 2004, $1.31 last year, and in 2006 they’re expected to earn $3.78.That’s phenomenal. Their forward P/E is around 24 times. Relative to the tremendous growth rate, I think the price is pretty attractive.

What are the risks?

I guess a risk is that people stop spending on port security and homeland defense issues, or that the Iraq war abruptly ends and their products aren’t needed to defend the borders. From an execution standpoint, there is some risk associated with their Chinese distribution plan. Nothing specific, but it’s important that they execute correctly and tap into the Chinese market successfully.