McAfee: The Class Leader

04/29/2005 12:00 am EST

Focus:

Stephen Biggar

Director, Product Strategy, Argus Research Corporation

Among my favorite sessions at each Money Show are the panels presented by Standard & Poor's, who in my mind, represent the highest in quality among Wall Street research. Here, equity analyst Stephen Biggar, looks at a "5-star" play in Internet security.

"McAfee (MFE NYSE) is the class leader in Internet security. It provides best-of-breed offerings designed to prevent intrusions on networks and protect computer systems from the next generation of blended attacks and threats. And with the ongoing proliferation of computer viruses and hacker attacks, we believe that McAfee, the security software maker, won't lack for business   Internet security remains a high priority for info-tech departments. Spending in this category held up through the technology downturn as enterprises couldn't afford to justify cutbacks because the risks were, and are, too great.

"We note that the primary risk is Microsoft's entry into the antivirus and spam-filtering markets with recent acquisitions. However, we see Microsoft focusing on the lower-end consumer. We also see McAfee as having a technology advantage to Microsoft's offerings, in addition to providing a broader suite of functionality. Overall, with its strong brand name in the security-software industry, we believe that the company will be able to fend off Microsoft's advances, particularly on the enterprise side of the business. In addition, we believe these risks are reflected in the share price.

"Meanwhile, the stock is trading at a discount to its peer group but should increase its earnings faster than peers, in our view, due to a streamlining aimed at concentrating on its faster-growing and more profitable security business. McAfee has also significantly improved its balance sheet, with approximately $925 million in cash and investments and no long-term debt at the end of 2004. With what we see as McAfee's strong brand name, attractive valuation, strong balance sheet, and improving profitability, we have our highest 5 STAR (strong buy) recommendation on the shares. Our 12-month target price is $32 per share."

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