Cybersecurity Companies Gear Up for Huge Role in 2013

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Cyber threats from hacktivists, criminal enterprises, and others will only grow worse in 2013 and beyond – increasing the importance of cybersecurity companies.

This has led the Obama administration to continually warn about cyber threats that are capable of causing widespread damage.

In a recent speech, Defense Secretary Leon Panetta said computer assaults from rogue countries or terrorists could be as destructive as the Sept. 11 attacks. At the Pentagon, plans have been in place since 2010 to combat this threat.

But it's not just the nation's security that is at risk. Most global corporations are also vulnerable to cyberattacks.

An August cyberattack on Saudi Arabia's state oil company, Saudi Aramco, incapacitated about 30,000 computers. It was probably the most destructive attack ever launched against a non-government entity.

The risk of an attack is particularly high in the corporate sector because of the complacency of its executives. According to a recent study by the consultancy firm PwC, entitled PwC's 2013 Global State of Information Security Survey, most executives are too optimistic about their companies' ability to handle cyberattacks.

The study warned that the rise in the number and sophistication of security incidents globally, along with scrimped corporate budgets, are leaving many firms open to attack. The survey found that, in reality, only 8% of companies truly qualify as information security leaders, with many faults detected.

For example, one of the most common faults found was the lack of a security strategy (protection against malware, etc.) to address personal devices used for work purposes in the workplace.

Mark Lobel, a principal in PwC's Advisory practice, told the Financial Times, "Security models of the past decade are no longer effective. Companies…should prepare to play a new game – one that requires advanced skills and strategy to win against emerging threats."

Growing Importance of Cybersecurity Companies

The lack of security among both corporations and governments presents a great opportunity for companies that deliver cybersecurity services. It is believed by most in the industry that companies will double or triple spending on cybersecurity over the next several years.

One company that plans to benefit from such a trend is telecoms giant, AT&T (NYSE: T). It recently told a Morgan Stanley telecoms conference in Barcelona that such attacks are creating a billion-dollar opportunity for the company.

Frank Jules, president of its global enterprise unit, told the conference attendees that cyberattacks on AT&T networks had doubled in just the past four months.

Jules said "We see them on a daily basis." He added that the attacks have become more targeted in order to evade rapid detection.

AT&T is hardly alone in seeing the business opportunity generated from cybersecurity.

Defense contractor Northrop Grumman (NYSE: NOC), along with Italian firm Finmeccanica, this past spring signed one of the most ambitious cyberdefense contracts ever with NATO. The contract, which will be worth several billion euro, is to provide cybersecurity for NATO's network across 50 sites and 28 member countries. Prior to this contract award, the company already had over $1 billion in cyberarms revenue.

Five major U.S. corporations – Intel Corp. (Nasdaq: INTC), Lockheed Martin Corp. (NYSE: LMT), Advanced Micro Devices Inc. (NYSE: AMD), Honeywell International Inc. (NYSE: HON) and the RSA Security division of EMC Corp. (NYSE: EMC) recently joined together to form a cybersecurity research consortium called the Cyber Security Research Alliance (CSRA).

The intention of the joint effort is to coordinate industry research and work closely with the U.S. government to develop "breakthrough technologies" to improve cybersecurity.

Cybersecurity Companies Born from Defense

The leaders in cybersecurity may very well turn out to be those companies well versed in defending against enemies – defense companies like Lockheed Martin, The Boeing Co. (NYSE: BA) and Northrup Grumman.

The managements at many defense firms are certainly pointing their companies in that direction. Many of the acquisitions made by defense firms in recent years have been focused on cyberdefense knowhow, and with good reason.

These companies are hoping to get a piece of the expanding U.S. budget for cyberarms. American defense, intelligence, and homeland security agencies currently spend about $10 billion annually on cybersecurity.

That is a very small portion of the Pentagon's $600 billion annual budget. But what should grab investors' attention is the fact that the $10 billion figure is expected to climb by at least 9% a year for as far as the eye can see (even as the rest of the Pentagon budget is facing possible mandatory cuts), according to software firm Deltek.

Investors should look to these firms as, once again, the first line of defense against enemies.

For a detailed look at the investing available in cybersecurity companies, check out this breakthrough report from our Chief Investing Strategist Keith Fitz-Gerald.

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