We are initiating coverage on McAfee Inc. (MFE) with a Neutral rating and a price target of $42.00. We believe McAfee is fairly valued at its current P/E multiple of 17.0X our 2010 EPS estimate of $2.34, which is a substantial discount to the industry average. Historically, the stock has traded in a 5-year trailing twelve month P/E range of 17.7X to 39.2X and we expect the company to trade in the same range going forward.
The company has delivered encouraging fourth quarter results, with revenue of $525.7 million, up 24.0% from the year ago quarter. Good execution and robust demand for security solutions helped McAfee achieve the sixteenth consecutive quarter of double-digit year-over-year revenue growth. This apart, the company’s fourth quarter 2009 earnings per share of 64 cents exceeded the Zacks Consensus Estimate of 48 cents.
The company also provided a good first quarter guidance. Management expects first quarter 2010 revenue in the range of $500 to $520 million. First quarter 2010 GAAP net income is expected to be in the range of 30 cents to 36 cents per share and non-GAAP net income in the range of 60 cents to 64 cents per share.
McAfee is one of the leading players in the software antivirus and internet security market. The company is slowly increasing its market share through its innovative and industry leading solutions. All customers, from retail to the largest enterprises derive value from the company’s unique and comprehensive security solutions, which provide improved protection, increased manageability and better return on security investments.
As per recent findings by Infonetics Research, McAfee Network Security Platform has attained the top spot in terms of market share for Network Intrusion Prevention Systems. We believe that the company’s portfolio of compelling solutions, aggressive marketing strategy and the revival in IT spending will enable it to continue growing its market share.
McAfee was founded in 1989 and is headquartered in Santa Clara, CA. It is a leading security technology company that secures systems/networks from known and unknown threats worldwide. The products offered by the company are intended for home users, businesses, service providers and government agencies.
For the upcoming quarter, the Zacks Consensus EPS estimate for McAfee currently stands at 50 cents per share, same as the most accurate estimate, thereby ruling out the scope for any earnings surprise. On the other hand, analysts have a mixed feeling about the stock, since six of them have revised their estimates upward in last 30 days, while five of them have revised downward over the same period.
The company’s product line can be divided into three broad categories, namely System security, Network security and Vulnerability and Risk management. The strong product portfolio, growth prospects in all its served markets, acquisitions, customer win momentum and solid cash flow are positives for the company.
On the other hand, we are a bit concerned about the intense competition that the company faces from smaller players, as well as hardware and software manufacturers entering the IT security business. This apart the enhanced level of security offered by Windows 7 also poses some challenges to McAfee.
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