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Cybersecurity Stocks: The 9 Names to Consider Now

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As long as the threat of security breaches and viruses exist, the corporate security market will continue to grow.

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Earlier this month, Americans were alarmed to learn that hackers had stolen nearly 1.5 million credit card numbers from Global Payments (GPN), an Atlanta, Georgia-based payment processor and former Visa (V) partner. Such stories have appeared in the news with increasing frequency, and it's not just large corporations being targeted by cyber criminals. In fact, small organizations, such as physicians' offices, saw the greatest number of data breaches last year. In a separate investigation, Verizon's (VZ) annual Data Break Investigations Report examined 855 account breaches from around the globe and found that criminals compromised 174 million records in 2011.

For investors, these stories point to an obvious trend: Cybersecurity stocks, already hot, are likely to continue gaining heat. Global spending on cybersecurity products and services is expected to exceed $71 billion by 2014, according to Gartner (IT), an information technology research and advisory firm.

Last year, Sean Udall, Minyanville contributor and author of the TechStrat Report newsletter, recommended 10 stocks to watch in the burgeoning commercial cybersecurity industry. (See Cyber Defense: Investing in the Modern Battlefield.)

More than six months later, he still believes some of these stocks represent compelling value. Others in the group may still be overvalued, though less so than six months ago. (Note: Blue Coat, a name from last year's story, was bought out by private equity firm Thoma Bravo LLC.)

Below, he explores some of the pros and cons of the various names in the group.


Check Point Software Technologies (CHKP)
CheckPoint.com

July 18, 2011 April 17, 2012
Price: $61.17 Price: $64.33
Annual Revenue: 1.173B Annual Revenue: 1.25B
EPS Growth: 26.53% EPS Growth: 18.18%
Sales Growth (Quarterly): 15.15% Sales growth (Quarterly): 12%
5 Year Average Sales Growth: 11.50% 5 Year Average Sales Growth: 12%
P/E: 26.03 P/E: 18.29

Check Point, the inventor of FireWall-1 and Stateful inspection technology, two landmark innovations, is known for customized security solutions designed to protect consumers from hackers, spyware, and identity theft. According to the company's website, its clients "include tens of thousands of organizations of all sizes, including all Fortune and Global 100 companies."

"I'll stand by my prior views that Check Point is one of the better growth companies in the space, one of the cleaner names. The stock is one of those that is doing a good job growing into its slightly higher valuation. I'd prefer to pick it up 10% lower (or more), but in my view this is a core name in the space," says Udall.

The stock has had its strongest early-year run since 2004, but Udall may get his wish for a discount as Bloomberg recently reported that the world's second largest security company may run into some headwinds as larger corporations, such as Dell (DELL) and Cisco (CSCO), mentioned below, seek to take a larger portion of the cybersecurity market share. The stock has gained 1% since the beginning of the year.

The company is growing and has made several acquisitions over the past several years. The Tel Aviv-based firm employs approximately 2,200 people, and its most recent purchase in October of last year was Dynasec, which provides governance, risk management, and compliance solutions. The company also purchased Nokia's (NOK) security appliance business last year, and two years ago acquired FaceTime Communications' application database, which added security controls for over 50,000 Web 2.0 widgets and more than 4,500 Internet applications to their company's portfolio.




Sourcefire (FIRE)
Sourcefire.com


July 18, 2011 April 17, 2012
Price: $28.60 Price: $49.84
Annual Revenues: 141.37M Annual Revenues:165.65M
EPS Growth: N/A EPS Growth: -12.5%
Sales Growth (Quarterly): 19.10% Sales Growth (Quarterly): 40.1%
5 Year Average Sales Growth: 23.57% 5 Year Average Sales Growth: 22.56%
P/E: 77.30 P/E: 55.62
This leading company, known for selling security software to the IT departments of large companies and governments, was named to TheStreet.com's Breakout Stocks portfolio in June of last year, and remains there. The 10-year-old firm is headquartered in Columbia, MD, and is best known for its open source Snort program, which the company says is "the world's most widely deployed intrusion detection and prevention technology." Sourcefire is also behind ClamAV, claimed to be the "most commonly used open source anti-virus and anti-malware gateway product."

"Sourcefire has been an absolute monster; just look at the move from $28 to $48 since we wrote about it in the first rendition of this piece. They recently reported a very strong quarter and the stock exploded to the upside," Udall says. "I wish I had invested in Sourcefire when it went public, and it has a very strong position in its niche, but the name is too hot for me currently."

M&A talks have constantly surrounded Sourcefire for the past few years, and if one of the deals materialize, investors can do very well with the stock. In the meantime, any rumors of a M&A will also help the stock price. Sourcefire was an acquisition target for Barracuda Networks in 2008 and and an acquisition target for Check Point in 2006. Because Sourcefire's Snort detection software is widely used by the US intelligence community, the potential for a sale to Check Point, which is based in Israel, prompted a severe political backlash.


Fortinet (FTNT)
Fortinet.com

July 18, 2011 April 17, 2012
Price: $26.53 Price: $27.55
Annual Revenues: 374.86M Annual Revenues: 433.58M
EPS Growth: 100% EPS Growth: 0%
Sales Growth (Quarterly): 34.97% Sales Growth (Quarterly) : 29.10%
5 Year Average Sales Growth: N/A 5 Year Average Sales Growth: 19.14%
P/E: 72.68 P/E: 44.36
Founded in 2000, this Sunnyvale, California, firm is a serious force in the cybersecurity world. In 2011, its revenue grew to $434 million, from $325 million in the prior year. Udall says, "I'd currently favor Fortinet over a few of the other small/mid cap names in the space currently. The growth has been strong and thus it's growing into the steep valuation, as exemplified by the last two 30% growth quarters.

"Moreover, of the names in the space, Fortinet would be near the top of my list of potential take-outs as they have a unique solution in the unified threat management, or UTM, area." Udall wishes he had bought the stock a few weeks after the first article because the price dropped seven to eight points, and it has since rebounded.

Fortinet announced last month the release of new network security applications for the mid-to-large sized companies. One of these applications was FortiManager-400C, which "provides centralized policy-based provisioning, configuration, and update management for FortiGate, FortiWiFi, and FortiMail appliances, as well as FortiClient endpoint security agents."

With more than 100,000 customers, Fortinet is considered a market leader in network security appliances and UTM. Customers include major corporations, telecommunication firms, and governments around the world.

Zacks.com still has Fortinet on its list of strong buys, or what it believes are the top stocks. The company beat the average projections of analysts for the fourth quarter of last year. Profits were $0.14 per share compared to the average estimate of $0.12 per share, and revenues rose 29% to $120.9 million, beating the average estimate of $116.8 million. Also, the stock is less expensive today as it trades at 45 times forward earnings compared to 72 times forward earnings in July of last year.


Guidance Software (GUID)
GuidanceSoftware.com

July 18, 2011 April 17, 2012
Price: $8.13 Price: $10.59
Annual Revenues: 97.28M Annual Revenue: 104.60M
EPS Growth: -20% EPS Growth: N/A
Sales Growth (Quarterly): 5.22% Sales Growth (Quarterly): 15.10%
5 Year Average Sales Growth: N/A 5 Year Average Sales Growth:N/A
P/E: N/A P/E 22.08
Guidance was founded in 1997 in Pasadena, California, and has since expanded to locations across the US and in Singapore. The company went public in December 2006, catching the market's attention with its forensic investigation software, which has the slogan, "If something bad happens in your company, they have a solution to help you track down the culprits."

"Also what's interesting about Guidance is that they are an accelerating growth story. Growth is ramping up from the high single digits (last year) and expected to be 24% in the coming year. At 2.5 times sales vs. other names in the 8.5 to 10 times sales range -- Sourcefire and Fortinet respectively -- the name is relatively cheap. On relative growth metrics I could see this stock trading closer to four times sales or around $15 a share," say Udall.

In addition to the stronger demand, Guidance has actively expanded its product line to keep itself at the top of the industry. Guidance Software specializes in incident response, computer forensics, litigation support, and "hands-on" digital investigation. It also trains corporate, law, and government professional in digital forensics.

Its flagship product is EnCase, which targets corporate government and law enforcement organizations to conduct computer investigations of various types, including intellectual property theft, incident response, and compliance auditing, according to the company's website.

Guidance announced last week the release of its EnCase Forensic version 7.03, which will allow companies to dedicate a computer to processing and storing evidence, increasing efficiency and resulting in less wasted time.

The company also announced a new version of its EnCase eDiscovery software earlier this year that will allow users to access data from more cloud-based data services, and it will feature a new collected data re-use feature for searching evidence collected for previous cases.

Several Fortune 100 companies use the EnCase platform, including Allstate, Chevron, Ford, General Electric, Honeywell, and Pfizer.


Symantec (SYMC)
Symantec.com

July 18, 2011 April 17, 2012
Price: $18.87 Price: $18.41
Annual Revenues: 6.410B Annual Revenues: 6.72B
EPS Growth: 25% EPS Growth: 94.12%
Sales Growth (Quarterly): 15.35% Sales Growth (Quarterly): 6.90%
5 Year Average Sales Growth: N/A 5 Year Average Sales Growth: 8.6%
P/E: N/A P/E: 10.30
"This company has been around for a long time – it's a security giant," says Udall. "The company's biggest challenger, McAfee, was bought by Intel (INTC), and Symantec has remained a wallflower buyout candidate for the better part of the decade. The stock is a perennial poor performer and the market seems to be moving faster than Symantec can innovate. In my view, better ideas and values exist in the industry."

Based in Mountain View, California, Symantec has been in the cybersecurity field since 1982, and now employs more than 18,000 people around the world. It services companies in the Americas, the Middle East and Africa, and the Asia-Pacific region, including Japan. The company specializes in securing, storing, and managing large amounts of information; its core businesses include consumer and endpoint security, storage management, and backup. Its software continues to aid Apple (AAPL) computer users in the removal of the Apple "Flashback" virus, which still infects 140,000 computers.

Symantec announced this past Monday that it has acquired the privately owned Nukona, which specializes in mobile application management. Symantec will now be able to provide a cross-platform mobile application protection solution to help organizations protect their data and applications used on company devices and personal devices.



Websense (WBSN)
Websense.com


July 18, 2011 April 17, 2012
Price: $26.77 Price: $21.23
Annual Revenues: 350.46M Annual Revenues: 364.18M
EPS Growth: 57.14% EPS Growth: 22.73%
Sales Growth (Quarterly): 10.79% Sales Growth (Quarterly): 7.40%
5 Year Average Sales Growth: N/A 5 Year Average Sales Growth: 5%
P/E: 41.86 P/E: 12.51

Websense of San Diego, California, focuses on data in transit, in email content, and over the Web. Its products and services are sold as software that can be installed on standard server hardware, or pre-installed on optimized appliances, or as cloud-based services, or in a hybrid appliance/SaaS configuration. According to company reports, the firm sells to "tens of thousands of enterprise, mid-market, and small organizations around the world."

The stock has struggled lately after it missed revenue estimates for the fourth quarter of last year, bringing in $92.7 million instead of the $94.3 million that analysts expected. Despite this setback, the stock has risen over the past two days, probably on M&A rumors.

"Growth has flatlined with Websense and that's compressing the valuation. Though whenever the M&A talk heats up, the name gets frequently mentioned. I would be surprised if Websense was still operating as a standalone company in one or two years," says Udall.

"Also, while revenue growth has been flat, EPS growth has been growing as the company has worked to improve margins. Time will tell, but given the increasing cyber threat that is now proliferating even into the smartphone vertical, that could potentially spur the company's growth."


CISCO (CSCO)
Cisco.com

July 18, 2011 April 17, 2012
Price: $15.435 Price: $20.08
Annual Revenues: 42.86B Annual Revenues: 44.84B
EPS Growth: -13.16% EPS Growth: 51.85%
Sales Growth (Quarterly): 4.8% Sales Growth (Quarterly): 10.80%
5 Year Average Sales Growth: 10.2% 5 Year Average Sales Growth: 9.36%
P/E: 11.61 P/E: 10.14
"This California-based technology behemoth provides hardware, networking, and communications services, among other products. Their many acquisitions have included security companies, including some industry leaders, like Ironport, an Internet filter, and Securent, which is known for its management authorization software," says Udall

According to Udall, "While a traditional core routing/switching play, I still view Cisco as a primary benefactor in the Internet security space. I was aggressively buying this (in the low-mid teens) last year into the largess of the correction. I still view the name as attractively valued even after the 30-40% move off those lows. As I said previously, the gear they make has embedded security solutions which will be increasingly important for enterprise and carrier security."

Cisco frequently acquires smaller companies, and last month, it acquired NDS Group, which provides "video software and content security solutions that enable users to intuitively view, search and navigate digital content anytime, anywhere and on any device."

Cisco's earnings last quarter topped analysts' expectations again by a significant margin. Cisco earned $0.47 on $11.5 billion in revenue, beating analysts forecasts, which anticipated $0.42 on $11.2 billion in revenue.


EMC (EMC)
EMC.com

July 18, 2011 April 17, 2012
Price: $26.64 Price: $29.33
Annual Revenues: 18.55B Annual Revenues: 20.01B
EPS Growth: 28.57% EPS Growth: 36.67%
Sales Growth (Quarterly): 20.43% Sales Growth (Quarterly): 14%
5 Year Average Sales Growth: 15% 5 Year Average Sales Growth: 15.5%
P/E: 25.62 P/E: 14.66

Ranking #152 in the Fortune 500 last year with total consolidated revenue of $17 billion in 2011, this company's stock is traded as a component of the S&P 500, and is near its 52-week high. It employs about 48,500 people and operates in more than 80 countries, according to its corporate website.

Among the $14 billion spent on the acquisitions of 36 technology companies was a 2006 purchase of RSA Security, which specializes in authorization of log-ins (still relevant). According to Udall, "EMC sells to the world's largest data centers, so they have layers of security throughout their product line. If this was still a standalone name, I'd likely still own it. " According to COO Pat Gelsinger, EMC projected that it spent about $3 billion on acquisitions in 2011.

Udall says, "I remain steadfastly bullish on EMC and view it a key holding in the data center and information security areas. The bonus is the company's huge holding of VMware (VMW) -- about 80%. Between the Cloud, datacenter and security products, EMC has great solutions to address these growth markets. I'm a buyer on any significant weakness."




Juniper (JNPR)
Juniper.com

July 18, 2011 April 17, 2012
Price: $30.30 Price: $21.62
Annual Revenues: 18.55B Annual Revenues: 4.45B
EPS Growth: -12% EPS Growth: -50%
Sales Growth (Quarterly): 15.54% Sales Growth (Quarterly): -5.80%
5 Year Average Sales Growth: 18.08% 5 Year Average Sales Growth: 15.11%
P/E: 28.07 P/E: 17.32

One of Udall's "favorite stocks," this Sunnydale, California, firm was once known mainly for its high-performance Internet Protocol network products, but over time its identity has come to include network security. Its $4 billion acquisition of NetScreen Technologies, a network security layer company, in 2004 was just one of the company's moves toward the e-commerce security market.

That means the company is moving in the right direction, says Udall. "Think about the amount of Internet commerce done today versus 10 years ago. Credit card numbers and social security numbers are flying through the Internet all the time. And most of them are safe because of these security networks. On top of the inherent industry growth thesis, Juniper's valuation is very compelling as the stock has fallen from highs in the $40s to the low $20s today. Recently, I've been trimming Cisco and some other technology names and reallocating those funds into Juniper.

"Moreover the company has remained active in buying assets in network security. These deals strengthen Juniper's ability to protect websites directly as well as the web applications running on them. The unique approach is to radically increase the costs for hackers and that could prove to be a powerful deterrent." (Read about Juniper's acquisition of Mykonos here.)

With over 9,000 employees and offices in 47 countries, Juniper's market cap was $11.3 billion in March 2012.

The company has experienced success in China over the past few years as well. Youku.com (YOKU), the Chinese equivalent of YouTube, deployed Juniper's network infrastructre in June of last year. Juniper's architecture was also purchased by China Mobile Limited (CHL), the largest mobile network operator in China.
No positions in stocks mentioned.
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