took a beating Tuesday after the secondanalyst in a week raised concerns about the security-software maker and a business slump in Europe.
Shares of Network Associates dropped 93 cents, or8.7%, to $9.7 in recent trading. Shares of competitor
declined 23 cents, or0.68%, to $33.40.
Lehman Brothers analyst Israel Hernandezdowngraded Network Associates to equal weight fromoverweight Tuesday morning, citing continued weaknessin European operations, particularly in its Snifferproduct line, which monitors and troubleshoots networkavailability and performance; lukewarm channel checksthat suggest near-term market share erosion in theanti-virus market; and the likelihood that consensusestimates for 2002 and 2003 will prove too aggressive.His firm has done banking business with NetworkAssociates.
In a note, Hernandez said the absence of any newprolific viruses -- akin to the Code Red and Nimdaviruses that boosted business last year -- reduces thelikelihood for significant upside from NetworkAssociates' corporate anti-virus business. NetworkAssociates also does not enjoy the benefit of asignificant consumer anti-virus business or presencein the small- and medium-sized business markets, areasthat remain strong and where rival Symantec appears tobe gaining share, Hernandez said.
"Among vendors selling both Network Associate andSymantec, the latter appears to have the most near-termmomentum, which we attribute to Symantec's maturechannel strategy and aggressive promotion and focus oncertain end-markets, such as small- and medium-sizedbusinesses, education and government," Hernandez wrotein his note.
His comments echoed an
earlier note last week from J.P.Morgan Securities analyst Sterling Auty, who raisedconcerns about Network Associates but suggestedSymantec is ahead of third-quarter estimates. Autymaintained his neutral rating on both companies. J.P.Morgan expects to receive or intends to seekcompensation for investment banking from Symantec andNetwork Associates. J.P. Morgan has done bankingbusiness for Network Associates in the past year.
Hernandez said he does not anticipate a reversalin the performance of Network Associates' Sniffer andEuropean businesses until early 2003. Hernandezreduced his third-quarter estimates to 11 cents ashare on $205 million in revenue from 12 cents a shareon $210 million in revenue. He also lowered his fourth-quarterestimates to 18 cents a share on $235 million inrevenue from 20 cents a share on $250 million inrevenue. That brings his fiscal-year 2002 estimatedown to 49 cents a share on $855 million in revenue from 52 centsa share on $875 million.
The Wall Street consensus calls for NetworkAssociates to earn 12 cents a share on $226.1 millionin revenue in the third quarter, 19 cents a share on$273.5 million in revenue in the fourth quarter and 53cents a share on $902.5 million in revenue in 2002,according to Thomson Financial/First Call.
Hernandez also lowered his 2003 estimates to 68cents on $966 million in revenue from 70 cents on $1 billion in revenue. Theconsensus estimate pegs 2003 earnings at 74 cents ashare on $1.1 billion in revenue.
Hernandez, however, believes most of thevaluation risk is reflected in Network Associates'stock and said he sees limited downside risk barring amajor downward earnings revision.