Information-technology security spending will increase as the economy perks up, a J.P. Morgan analyst said Wednesday, but the main beneficiaries will be authentication and authorization, not antivirus and firewall services. While defensive-security stocks outperformed access-control companies by 35% over the last two years, no longer will companies be strictly interested in firewall and antivirus products in the coming months. Based on this premise, analyst Sterling Auty upgraded access-control software companies, Netegrity ( NETE) and SonicWall ( SNWL) but downgraded defensive-based companies, Check Point ( CHKP) and Symantec ( SYMC). The analyst expects an increase in new customer activity at Netegrity's partners and in its sales, and he believes this will be "a precursor to bigger things." As such, Auty upped the company to overweight from underweight and raised his 2004 estimates to 6 cents a share from a loss of 6 cents a share. Shares of Netegrity jumped about 13% in morning trading to $6.88. Additionally, Web services, programs that automate data delivery between applications or companies, need to be secured via authorization. And the analyst sees enterprises focusing heavily on Web services spending in the coming year. Netegrity is a forerunner in Web services, Auty said, and he thinks the company will receive the most spending for authorization products. Meanwhile, SonicWall has seen strong sales of its combined 802.11 access-point firewall in the U.S. Auty also believes the company is doing well with its new focus on the low-end market with new products expected in the fall. SonicWall is in the middle of a turnaround, including a recent 15% workforce reduction, and the company's earnings guidance is conservative, with profitability expected in September, Auty said. He upgraded the stock to neutral from underweight, saying SonicWall's "$3.48 cash per share puts a floor under the stock." Recently, shares of SonicWall were up 4.4% at $5.17.
Unless product revenue starts to improve, Auty doesn't see sustainable top-line growth at Check Point, partially because product revenue has been growing faster at rivals NetScreen ( NSCN) and Cisco ( CSCO). Further, the analyst said Check Point resellers are discouraged because margins are weak as a result of abundant price competition. "We think tough decisions are coming. Changes bring a risk of disruption," Auty said in a research note, and he downgraded Check Point to underweight from neutral. The analyst also lowered his expected 2004 EPS to $1 from $1.03. Check Point's shares were recently up about 0.6% at $19.71. Finally, Symantec was downgraded by Auty to underweight from neutral, predominantly because antivirus products represent about 60% of the company's revenue. "This is a primary category that we expect will not see incremental spending as the economy picks up," he said. The analyst doesn't think Symantec will beat the high end of his $390 million revenue guidance, despite the fact that the company topped estimates in the past three quarters by an average of 5%. Partly to blame is increased competition from Microsoft ( MSFT), which recently acquired antivirus software company GeCAD Software. Shares of Symantec dropped 2.2% in midday trading to $43.30, while Microsoft was up 2.8% at $26.89.