Security Stocks Worth A Look

[InfoSec News <isn () C4I ORG>]

http://www.internetstockreport.com/column/article/0,1785,1661_528921,00.html

by Chris Nerney
December 7, 2000

No Internet sector has escaped this year's bear mauling, including
current investor favorites such as fiber optic and wireless.  Indeed,
it's entirely possible that fewer than 30 'Net stocks will post gains
in 2000. If so, the Security sector could be represented on that
modest list by four or five companies, which would give it far and
away the best showing of any one Internet group.

That security stocks would be among the top performers this year - or
any, for that matter - really shouldn't be a surprise. After all, as
with bandwidth, there is no such thing as "enough" security, and there
will always be a demand for effective network security products and
services.

But it also is a tough market to crack. Large corporations are
understandably reluctant to switch security vendors, thus it's hard
for newcomers to gain a foothold. That's one reason why the security
remains one of the smallest sectors, with no more than 20 publicly
traded firms.

So are there any security stocks worth investing in these days? Let's
take a look.

Most investor attention has been directed toward virtual private
network and firewall market leader Check Point Software Technologies
(NASDAQ:CHKP), one of the two or three top gainers among 'Net tickers
all year. Shares closed Wednesday at $139.25, or 180% above their Dec.
31 price.

CHKP's popularity on the street is understandable. With trailing 12
months' revenue of $353 million, the company easily outdistances
runner-up and competitor RSA Security (NASDAQ:RSAS) (formerly known as
Security Dynamics Technologies), which has notched sales of $264
million over the past four quarters.

Check Point not only has been profitable every quarter back through
1997, the Israel-based company has increased per share net profits for
eight consecutive quarters. Further, revenue growth has been
accelerating on a quarterly basis.

Clearly, then, CHKP is the class of the sector. But with a valuation
through Wednesday's close of 60x TTM revenues, Check Point has the
second most-expensive stock among security players. (InterTrust
Technologies, a perpetual money-loser, is the priciest at 65x TTM
revenues of $5.8 million.) I believe CHKP is overdue for a correction.

As is Netegrity (NASDAQ:NETE), whose shares have gained 55% for the
year-to-date through Wednesday. NETE eked out its first profit (3
cents per share) in Q3, but it has neither the earnings history nor
the sales volume ($37.3M over the past four quarters) to justify its
$1.8 billion cap and TTM revenue multiple of 47x. While Netegrity
looks like a comer - sales have finally taken off this year and it is
newly profitable - shares appear to have gotten ahead of the game.

There are, however, several other profitable security companies whose
shares are priced more attractively. They are RSA Security, AXENT
Technologies (NASDAQ:AXNT), Internet Security Systems (NASDAQ:ISSX)
and WatchGuard Technologies (NASDAQ:WGRD).

RSA Security, which specializes in authentication, encryption and
public key management products, posted a 94 cents per share net profit
in the recent quarter, best among all security firms, and has been
profitable each quarter for the past four years. Shares are down 40%
for the year.

With a solid earnings record and total revenues, RSA's valuation of
7.3x TTM revenues seems especially attractive. One area of concern:
Year-over-year quarterly revenue growth has been stuck around 30%
since Q1.

Security management and firewall software provider AXENT has an even
lower revenue multiple: 4x TTM sales of $135 million. But AXNT, whose
shares are down 12% YTD, is barely profitable - 2 cents per share in
the most recent quarter. And sales have stagnated, with revenues from
last year's Q4 actually topping those from each quarter in 2000.

WatchGuard Technologies, which offers network security software and
services on an outsourced subscription basis, turned its first profit
(50 cents per share) in Q3. With only $47 million in revenue and a
market cap of $791 million, the company is in the second tier of
security companies. Thus, its valuation of 17x TTM revenues isn't
compelling. For the year, WGRD is just about where it started, having
gained less than 1% through Wednesday.

Finally, Internet Security Systems recently completed its seventh
straight profitable quarter (11 cents per share). The Atlanta-based
company, up about 8% this year, has the second-highest market cap
($3.3 billion) of all 'Net security vendors, with a valuation of 19x
TTM revenues of $172 million.

With robust revenue growth and increasing earnings, ISSX looms as an
emerging 'Net security powerhouse. I would look for a slightly better
entry point than the current $76.94 per share, but given the volatile
market of late, who knows, ISSX might be trading below $60 by week's
end.

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