RAE Systems, Inc. (RAE)

Hazardous chemical detection equipments were confined to industrial usage until the threat of chemical warfare dawned. This created another addressable market in terms of defense and security needs. Increasing terrorism threats only helped to increase the awareness of these detection devices. REA systems, is one of the companies that came out with products to address these markets. They produce an array of mutisensor hazardous chemical detection equipment and related networks to store and analyze the data collected.

A couple of years post 9/11 the company made a strategic shift to focus more on industrial products. This strategy paid off as the Department of Defense (DOD) began to cut its indiscriminate spending on military applications recently. The company-acquired majority shares in KLH, a chemical hazard detection equipment firm in China. By 2006 the revenue share from security market reduced to 10% from 50% that was prevailing during 2001-02.

Bullish equipment sales to industrial sector in Asia and good performance by the wireless products in Europe lifted the net revenue by 12% for the nine-month period ended September 30. For the same time period, the U.S government spending on chemical detection equipment slackened, but the effect on the company fortunes was minimal, as it had made an effective shift to industrial markets.

World chemical and biological detection market will be growing to $750 million by 2007, and a major part of that will be coming from industrial spending. China with its fledging industrial sector and other emerging markets will be a major contributor to this growth. Also, China is planning to spent billion of dollars in modernizing its coal mines to avoid accidents and a sizable amount will be set aside for gas detection and leakage which is a major cause of fires. The company with its presence in China is in a position to take advantage of these situations. These developments should help increase the stock price in the coming year.