After slide, cybersecurity stocks look attractive

Fortinet and Check Point Software slide on disappointing results, but the sector is in the midst of a boom.

By TheStreet Staff Oct 18, 2012 1:52PM LoGoBusinessman working on computer © Janis Christie/Photographer's Choice RF/Getty ImagesBy James Rogers


It hasn't been the best week for the much-hyped security specialists  Fortinet (FTNT) and Check Point Software Technologies (CHKP).


Shares of the cybersecurity firms took a nosedive on Wednesday amid concerns about business spending. Investors, though, can now buy the shares more cheaply, given that the industry is in the midst of a growth phase, analysts say.


"It is clear that macro conditions are tougher, but security is continuing to hold up relatively well," wrote Todd Weller, an analyst at Stifel Nicolaus, in a note released Wednesday.


Shares of Fortinet closed down 19% at $20.14 on Wednesday, the day following its third-quarter results. Although the Sunnyvale, Calif.-based firm met analysts' estimates, it lowered its full-year revenue forecast to between $524 million and $528 million. Previously, Fortinet had predicted revenue of $525 million to $530 million.


Check Point shares plunged 13% to $41.15 following the firm's fourth-quarter forecast, also released Wednesday. The Tel Aviv-based network security firm predicted revenue between $355 million and $387 million, a broad span reflecting a climate of economic uncertainty. Analysts were looking for revenue of $382 million.


Speaking on a conference call to discuss the results, Check Point CEO Gil Shwed blamed the conservative outlook on worries in Europe, but also pointed to double-digit growth and "very good results" in the United States.


Stifel Nicolaus' Weller thinks Check Point's guidance may be too cautious. 

"The lower end of the range is likely overly conservative," he wrote. "The low end of the range implies a double-digit year-over-year decline. While anything is possible, we have not picked up anything that suggests that degree of pressure is likely to materialize."


Weller lowered his Check Point price target from $64 to $55, but alerted investors to the company's potential. "The appropriate course of action is to view this as a buying opportunity," he wrote.

Market opportunities ahead


FBR Capital Markets analyst Daniel Ives maintained his "outperform" rating on Check Point.

"We continue to see a high level of interest in the company's product strategy in the field and believe Check Point is well-positioned to capitalize on a healthy market opportunity in the network security landscape for the next 12 to 18 months," he wrote. "While it would be easy to throw in the towel on Check Point today, we continue to believe in the re-accelerating growth/billings story into 2013 and ultimately believe the risk/reward on the shares is compelling at current levels."


Similarly, Fortinet has not lost its luster on Wall Street, despite a slower-growth quarter and weaker than expected performance in China.


"We continue to be positive on the fundamentals for the company, including an attractive growth market, broad product line and high-performance solutions that span all vertical markets and geographies," wrote Rick Sherlund, an analyst at Nomura Equity Research, in a note. "We maintain a 'buy' rating on more conservative estimates."


During a post-earnings interview with TheStreet, Fortinet's outgoing chief financial officer, Ken Goldman, highlighted recent large deals. During the third quarter, he said, Fortinet had 61 deals over $250,000 and 16 over $500,000, compared with 39 deals over $250,000 and 13 over $500,000 in the same period last year.


Goldman, who's leaving Fortinet to become chief financial officer at Yahoo! (YHOO), also pointed to the company's new FortiOS 5.0 operating system, which the company touts as a way for businesses to deal with advanced security threats, and the bring-your-own-device (BYOD) phenomenon, whereby employees hook up their own gadgets to corporate networks.


"We're well-positioned with the new products we just announced," he said. "It positions us well to finish off the year in Q4."


FortiOS 5.0 runs on the company's flagship FortiGate device, an all-in-one security product that combines firewall, anti-virus, VPN and intrusion-prevention systems.


Fortinet is also one of TheStreet's Breakout Stocks. Portfolio manager Bryan Ashenberg took advantage of the company's recent weakness to add to his Fortinet position.

Symantec on deck


Sourcefire (FIRE), another Breakout Stock, also took a pounding on Wednesday, closing down 12% at $42, although Ashenberg pointed to the firm's recent positive pre-announcement. "Its government exposure helped insulate its quarterly results," he noted.


Next week, all eyes will be on security software giant Symantec (SYMC), which reports its fiscal second-quarter results on Wednesday. The Mountain View, Calif.-based firm recently swapped out its chief executive, replacing Enrique Salem with Steve Bennett, who has not yet revealed his plans for the company.


"We see a neutral setup for Symantec shares," wrote Stifel Nicolaus' Weller in a recent note. "The near-term driver of this stock will revolve more around the outcome of the new CEO's 120-day review as opposed to the fundamentals. However, don't expect September quarter results to yield a material update here."


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