We've all heard that the internet is the new wild west. There are rustlers and outlaws, now called hackers and spammers, and there are sheriffs and deputies in the form of security software companies. We're going to look at three companies whose products are on duty 24 hours a day keeping our computers safe from hackers, viruses and spam.
Big Gun - For Now
Mention computer security and Symantec (Nasdaq: SYMC) comes to mind as the standard by which everything and everyone is measured. The company's huge suite of products for both consumer and enterprise-level customers is impressive.
With sales over $5 billion and a market capitalization of approximately $18 billion, SYMC generates a huge amount of cash flow. The flip side is that, although the company has a gross margin over 76%, its net margin is not quite 9% and its return on equity a paltry 3.5%.
Symantec recognizes the consumer segment is a mature market and can reasonably expect to generate a stable cash flow from license upgrades via electronic retailers, internet retailers and PC manufacturers. It also knows that its product suite is best suited to large enterprise level customers where it can cross-sell other products such as storage.
Have you ever clicked an icon to buy something on-line? Ever sent a text message over your cell-phone? If you answered "yes" to either of those questions, the odds are good you used a product developed by VeriSign (Nasdaq: VRSN). The company's core business has grown at an admirable rate, generating $1.58 billion is sales last year with a market capitalization of $7.4 billion, a net margin of almost 24% on a gross margin of 66.7%, resulting in a return on equity of nearly 20%.
VeriSign does have a couple of red flags however. First, its made so many acquisitions that it literally has its own cadre investment bankers on staff. One has to assume it plans on more if that is the case. Second, although the firm has no debt, it uses cash to repurchase shares on the open market. This would be great - if it didn't then dilute the shares via option grants to executives. This becomes particularly disturbing as the two values tend to be remarkably alike when viewed over several years. (To learn more on this subject, see Red Flag Phrases: "Material Adverse Effect".)
The company has a very intriguing product for the future. It has developed a radio frequency identification system called "Pedigree Solutions" that allows real-time motion tracking of products or people. VeriSign is a front-runner with this technology system, although it isn't the only company with such a product. Pharmaceutical companies would be big users as they need the ability to track their products throughout the supply chain. And there are other possibilities: airline security, corporate and government executives, defense and weapons systems could be just a smattering of potential applications.
Playing Catch Up
The price of complacency is that at some point you have to play catch-up and that is what McAfee (NYSE: MFE) is doing. With sales of just over $1 billion last year, and a market capitalization of $5.8 billion, this is not a small time operation. After its reorganization and some divestitures, the firm is in financially decent shape with no debt, a net margin of 14% on a gross of 83% and returning 11.5% on equity. That's the good news.
The problem is McAfee does not offer anything particularly distinctive. It has the requisite product suite but no competitive advantage in terms of products. To compensate for this, MFE is bundling its security solutions, and partnering with internet service providers such as AOL, AT&T (NYSE: T) and manufacturers such as Dell (Nasdaq: DELL). The results have been positive, with MFE seeing marked improvement in its consumer base of customers.
Too Many Players On The Field
These three companies all face competitive threats from some big-league players such as Microsoft (Nasdaq: MSFT), Yahoo (Nasdaq: YHOO), Cisco Systems (Nasdaq: CSCO) and International Business Machines (NYSE: IBM). Price/earnings multiples are also a measure of the market expectations, and McAfee trades at roughly 25-times earnings, Symantec at 49-times and VeriSign at 58-times.
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