Editor's note: As part of our partnership with PBS's Nightly Business Report, TheStreet's James Rogers appeared on NBR to discuss tech security companies in the wake of the Intel-McAfee deal. (Watch video)
NEW YORK (TheStreet) -- Intel's (INTC) - Get Intel Corporation Reportshock $7.7 billion acquisition of McAfee (MFE) has thrust security stocks into the spotlight and investors scramble to buy up shares of companies that could be tech giants' next big buy.
Check Point Software Technologies
Blue Coat Systems
, while not exactly household names, are looking increasingly attractive to investors, particularly as security stocks start to see major upside in the
"If anything, the Intel deal validated that this whole sector is cheap," Todd Weller, an analyst at Stifel Nicolaus, told
. "A year ago, investors retreated away from security because they felt it was too defensive."
Not any more. With potential for M&A and future share growth, investors should be checking out the
hottest companies. Here are the the ones to consider.
, ArcSight makes security management and compliance software.
only went public in 2008
, but has already made a big name for itself, putting out consistently impressive quarterly numbers. CEO Tom Reilly recently
that ArcSight is on track to reach its target of 18% to 20% operating margin in fiscal 2012.
The software maker, which is trading around $28, reports its first-quarter results next week, and analyst firm
recently raised its first-quarter and fiscal 2011 earnings estimates for ArcSight, citing a positive near-term outlook for the company. "While we have longer-term concerns regarding the competitive landscape, our checks suggest ArcSight had a good quarter," explained JMP analyst Pat Walravens, in a note, maintaining his market perform rating for the company.
ArcSight's Price-Earnings (PE) ratio, a key indicator of earnings growth, is nonetheless healthy. The software specialist's forward-looking P/E ratio is 30.99, compared to 13.06 and 9.00, respectively, for rivals
Check Point Software Technologies
Will Check Point be the next security firm to get snapped up by a large tech firm? The network security specialist has been in the spotlight since Intel's McAfee move, and there has been plenty of speculation that
will follow the chipmaker's lead and grab a security company.
The highly profitable Israeli firm would certainly make an attractive target, based on its recent performance. Another of
top security picks, Check Point put out record second-quarter results in July and also raised its 2010 outlook. The company has also
such as secure virtual desktops.
With a market cap of $7.41 billion, however, Check Point wouldn't come cheap.
"Acquisition rumors around Check Point have been going for years," Allan Krans, an analyst at Technology Business Research (TBR), told
. "The question is who would they fit with? They are also a large company, so it would be a sizeable deal."
Even without the potential for M&A, though, Check Point is still a company to watch. The
rival counts all
companies among its customers and has seen lots of sales growth across its main product lines and geographies.
The Check Point story, however, has gone largely unnoticed by investors. Its stock has risen around 5% this year.
Blue Coat Systems
Although not a pure-play security company, Blue Coat, based in Silicon Valley, gets a lot of attractive play: It builds hardware and software for securing Web communications and delivering enterprise applications, two key technologies. Investors, though, may need to take a longer-term view on Blue Coat.
Blue Coat put out mixed first-quarter results last week, with European sales, in particular, weighing heavily on the company's numbers. Despite beating Wall Street's profit estimate, Blue Coat's revenue dipped below consensus expectations and the firm also gave weaker-than-expected guidance. Set against this backdrop, the company's stock headed southward, plunging more than 7% to close at $17.50 on Friday.
Despite these issues, analysts are still bullish on Blue Coat's long-term prospects. "We believe that, despite some near-term fundamental issues that are plaguing the company, investors should be aggressively buying the stock," explained Stifel Nicolaus' Weller, in a recent note. "We think the current weak valuation yields little downside risk."
Blue Coat's stock is down more than 36% this year, although Weller is confident that the firm can resolve its sales execution issues sometime within the next two to four quarters.
Other analysts also believe that Blue Coat deserves attention. "Although Blue Coat is hitting speed bumps, we continue to believe these are near-term, very fixable, issues that should be resolved in the coming quarters," wrote Michael Bauer, an analyst at FBR Capital Markets, in a recent note. "We would encourage investors, particularly those with a longer-term perspective, to build positions at current levels."
There were other positives in Blue Coat's first-quarter numbers that bode well for the future, notably a strong operating margin, which signals tight expense control. Crucially, Blue Coat's management is also taking immediate action to address its sales issues in Europe.
-- Reported by James Rogers in New York
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