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TheStreet Open House

Fortinet CFO Resignation Due to Personal Reasons, BoA Suggests

NEW YORK (TheStreet) -- Bank of America Merrill Lynch analysts are "comfortable" with the abrupt resignation of Fortinet (FTNT) CFO Ahmed Rubaie and have upgraded their rating of shares in the network solutions provider to "buy" and a $24 a share price target.

On the Wednesday before Thanksgiving, Fortinet said Rubaie would resign after just seven months as CFO of the company. The announcement, called "unsettling" and a "shock" by analysts, was taken as a cloud on what many perceive to be an incipient turnaround at the Sunnyvale, Calif.-based company.

After meeting with Fortinet's management, Bank of America Merrill Lynch appear to believe Rubaie's resignation was due to personal reasons and not any issues surrounding the firm's financial reporting.

"After speaking with senior management, we feel comfortable that Mr. Rubaie's decision was due to personal reasons and not to any disagreements over the financials," Bank of America Merrill Lynch analysts said in the Tuesday upgrade.

"Our sense is that a new CFO will be announced much sooner compared to last transition when it took roughly 7 months to find a replacement to former CFO Mr. Goldman. We also believe the company is leaning towards filling the role with two executives for each the operational and the financial roles which we view as a positive," the analysts added.

Fortinet said on Nov. 27 that Rubaie will leave the company "for personal" reasons on Dec. 5, and will be replaced by Nancy Bush on an interim basis. Bush served the company as CFO Sept. 2012 to April 2013, when Rubaie was appointed for the role.

"On behalf of Fortinet, I would like to thank Ahmed for his contributions as a senior member of our leadership team," said Ken Xie, Fortinet's founder and CEO said in a press release.

The abrupt CFO change on the eve of the Thanksgiving holiday left analysts scratching their heads and is likely to be perceived as a negative for the company, which has under-performed broader markets in the past 12 months. According to some analysts, Rubaie was supposed to be a key ingredient to Fortinet's turnaround, given his strong track record at firms such as Ariba.

Fortinet's surprising pre-Thanksgiving bombshell, however, also appeared to accompany a confirmation of the firm's quarterly earnings guidance.

"Although most of our quarterly sales are closed in the last few weeks of each quarter, based on where we stand today we are currently tracking well to guidance targets and feel confident in our business," Fortinet CEO Xie said.

Bank of America Merrill Lynch analysts continue to monitor Fortinet's management situation and the sudden nature of Rubaie's resignation. Still they see a good balance of risk and reward at current share prices.

"We believe investors' concerns are legitimate, especially given Mr. Rubaie's short tenure and the fact that the last CFO transition led to execution issues in 1H13 Fortinet is still recovering from. While we acknowledge potential risks as Fortinet navigates yet again through a CFO transition, we believe the risk/reward profile is compelling, with the stock trading at 2.8x EV/2015E Sales, a steep 35% discount to the 4.3x multiple accorded to enterprise security peer group.

Fortinet shares were rising over 1% in Tuesday trading to $16.97. Shares have fallen over 13% in the last five trading days and are down nearly 20% year-to-date, significantly under-performing the S&P 500.

--Written by Antoine Gara in New York

Follow @antoineGara

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