Three Software Stalwarts

While the industry is mired in a slump, these firms remain strong -- and attractive for investors

By Jonathan Rudy

The software sector has been hit hard during the technology sell off over the past year. After falling nearly 50% in 2000, the S&P Computers Software and Services Index was down about 12% during the first quarter of 2001, versus a 10% and 12% decline for the S&P 500, respectively.

However, there are a number of strong companies that have been negatively impacted along with the rest of the group. Three of them are listed below:

Rational Software

Shares of this leading software provider are down significantly in 2001, primarily due to the impact of the slowing global economy on Rational's growth rate for fiscal 2002 (ending in March). Rational lowered its projections in April for the upcoming fiscal year due to delayed information technology spending, a result of the currently challenging economic environment. However, long term, Rational provides the software that other software companies utilize to develop their own software products.

The three key segments for Rational are: e-business, e-infrastructure, and e-devices.

E-business, which accounts for approximately 35% of Rational's revenues, is focused on organizations that are leveraging the power of the Internet to improve their businesses by building business to business (B to B) and/or business to consumer (B to C) software. Customers of this segment include Merrill Lynch, Goldman Sachs, and Worldcom.

E-infrastructure, which accounts for about 45% of Rational's revenues, focuses on customers that are building the physical and software infrastructure for the Internet and include communications as well as operating system and middleware software vendors. Clients in this segement include Cisco, IBM, Microsoft and Sun Microsystems.

E-devices accounts for approximately 10% of Rational's revenues. This segment focuses on customers that are building devices with embedded software that provide connectivity to the Internet and other specialized networks. Its customers in this segment include Nokia, GE, Motorola, and Palm.

Rational is a well-managed, profitable company. We expect the company's revenues to increase about 15% in fiscal 2002, following an anticipated 40% gain in fiscal 2001. The slowing global economy is the primary reason for this deceleration in growth for Rational. However, when the economy recovers, Rational is positioned to grow in excess of 20% for a sustained period of time. At 29 times our lowered fiscal 2002 EPS estimate of $0.56, the shares (RATL ; ranked 4 STARS) are attractive for accumulation.

Checkpoint Software

The shares of this leading provider of network security products are down approximately 29% in 2001, due to the sell-off in the broader technology market. However, business at Checkpoint remains strong as companies have Internet security as a top information technology spending priority.

Checkpoint's main products include virtual private networks (VPNs), firewalls, intranet and extranet security, and managed service provider (MSP) management software. Within the company's enterprise business, the product line includes its FireWall-1 family and its VPN-1 family of virtual private networking solutions. These products insure that transactions done over the internet or within a company's intranet can be completed privately.

We expect that revenues will increase at an impressive 55% in 2001 due to this strong demand for corporate internet security products. Checkpoint remains one of the most profitable companies we cover with both operating and net margins over 50% in the most recent quarter ended December 31, 2000. Checkpoint is an Israeli based company and thus achieves tax breaks that result in an exceptionally low tax rate. With more shares outstanding, our 2001 EPS estimate of $1.27 is a 52% increase from 1999. At nearly 50 times our 2001 EPS estimate, the shares (CHKP ; ranked 4 STARS) are attractive considering the company's dominance in an explosive industry, and whose earnings have held up during the most recent global economic slowdown.


The shares of this leading provider of security solutions are up 56% in 2001, due to better than expected results in early 2001. The company's recent acquisition of AXENT Technologies is going well, and the stock market has responded positively to this news.

Symantec has one of the two top anti-virus software products; Norton Antivirus. Antivirus software programs generally protect computers from crashing and from other serious file-related problems. The market has received a good deal of attention due to high profile virus outbreaks, such as the 'I Love You', Melissa, and Anna Kournikova viruses. The initial estimates of the damage caused to the companies and other organizations hit by the 'I Love You' virus were at least $2.6 billion.

While Symantec has a strong position on the consumer retail side of the business, with its acquisition of Axent, the company has an opportunity to greatly expand its enterprise business with Axent's technology and client base. We see revenues rising over 20% in fiscal year 2002 (ending in March) for Symantec. Due to some near term dilution from the Axent acquisition, we anticipate that EPS will increase approximately 15% during fiscal 2002, to $3.20. At 16 times our fiscal 2002 estimate, with a long term growth rate of 15%-20%, the shares (SYMC ; ranked 5 STARS, buy) are attractively valued and should continue to outperform the market over the next year.

Rudy is a software and computer services analyst for Standard & Poor's

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