Three Likely Winners in Software
By Jonathan Rudy
As companies begin to rebuild from the terrorist attack on September 11, they will need to increase their capital spending in some vital areas -- especially technology infrastructure. The primary lesson for businesses from the tragedy has been the importance of investment in multiple locations for infrastructure in order to keep operations running 24 hours a day, 7 days a week.
And we at S&P believe that two particular areas within the software sector stand to benefit the most from this increased infrastructure investment: Internet security and storage software. Check Point Software (CHKP ) and Symantec Corp. (SYMC ) are the leaders in the Internet security group, while Veritas Software (VRTS ) has a top position in the storage software segment. Below we size up the prospects of these three companies.
Check Point Software
The shares of this leading provider of network security products are down significantly in 2001, because of investor worries over information technology spending, and the sell-off in the broader technology market. However, business at Check Point remains strong as Internet security is still a top information technology spending priority at many companies.
Check Point'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 an impressive 37% in 2001 due to this strong demand for corporate Internet security products. Check Point remains one of the most profitable companies we cover with both operating and net margins over 50% in the most recent quarter ended June 30, 2001. Check Point is an Israel-based company and thus achieves tax breaks that result in an exceptionally low tax rate. With more shares outstanding, our 2001 earnings per share estimate is $1.30, a 54% increase from 2000. Trading at about 20 times our 2001 EPS estimate, with a 25% sustainable growth rate, the shares (ranked 4 STARS, or accumulate) are attractive considering the company's dominance in a rapidly-growing industry, strong balance sheet, and whose earnings have held up during the most recent global economic slowdown.
Symantec, a leading provider of security solutions, has seen its shares rise about 20% 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 2003 (Mar.). We anticipate that EPS will increase approximately 20% during fiscal 2003, to $2.88. At 15 times our fiscal 2003 estimate, and with a long term growth rate of 15%-20%, Symantec shares (ranked 5 STARS, or buy) are attractively valued and should continue to outperform the market over the next year.
Shares of this leading storage software company are down significantly in 2001, primarily due to the impact of the global economic slowdown on information technology spending, in addition to the general tech-stock sell-off. However, we believe that Veritas will be the long-term winner in the storage software market, and will benefit as such from increased spending on storage products.
Veritas is a provider of data availability products, which helps customers manage their data storage in complex and diverse computing environments efficiently and cost effectively. The company's products provide protection against data loss and file corruption, rapid recovery after disk or computer system failure, the ability to process large files efficiently, and the ability to manage and back up data distributed on large networks of systems without interrupting users.
With the stock trading at approximately 30 times our 2002 operating EPS estimate of $0.83, and about 5 times our forward sales estimate, we believe Veritas is vulnerable in the near term to an earnings disappointment and thus, would not add to positions at this time. However, considering that Veritas will be a significant beneficiary from increased capital spending, has a strong balance sheet, and is a market leader, we have a ranking of 3 STARS, or hold, on the shares.
Rudy is an equity analyst who covers software stocks for Standard & Poor's