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Crime Pays for Online Security Company

Stocks in this article: SNWL

SAN JOSE, Calif. ( TheStreet) -- Many consider the Internet the next battleground for terrorist attacks, vandalism and theft in the coming years. Companies will need to beef up their online security systems to combat cyber attacks that are increasingly vicious and complex.

Betting on the push to shore up digital defenses can lead investors to big name options such as Check Point Software Technologies (CHKP), McAfee (MFE) and Symantec (SYMC). But if you're looking for a lesser-known player in online security, consider San Jose, Calif.-based SonicWALL (SNWL).

Trends in Identity Management (Forbes)

SonicWALL handles Internet security for broadband customers, small- and medium-sized businesses, and remote networks. Its shares have climbed 82% during the past year, outpacing the 66% advance of the Russell 2000 Technology Index.

Despite the run-up, the shares remain cheap, with a forward price-to-earnings ratio of 23 versus an industry average of 43. The company also looks attractive based on free cash flow. SonicWall's price-to-free cash flow ratio of 17 is a fraction of the industry average of 85.

Last week, the company said first-quarter earnings doubled to $4.4 million, or 8 cents a share. Excluding certain items, the company's profit was 12 cents, which beat analysts' estimates by 2 cents.

SonicWALL does more with less, boasting a gross margin of 71% versus the industry's 32%. Its impressive 6.7% profit margin is twice the industry average and shows how it pushes numbers down to the bottom line.

Now that economic indicators are pointing toward growth, it's reasonable to assume that businesses will soon put money toward improving their computer systems. Online security will likely be high on their lists.

The stock is thinly traded, which means the stock may be difficult to sell at a good price if a shareholder needs his money immediately. But for investors who don't quick access to their cash, this stock offers a solid opportunity to diversify into online security.

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