This week's recommendation: NETA
Important Update; Complete analysis on NETA: 4-10-99
Network Associates (NETA) was formed in December of 1997, by the merger of McAfee Associates and Network General. McAfee paid $920 million to acquire Network General, completing the transaction using the pooling of interest method of accounting. Meaning, there is no goodwill to amortize as part of the acquisition, but the newly formed company must absorb all of the outstanding shares of both companies. The newly created company offers a full line of network products to its corporate customers, particularly those running the Windows NT operating system. NETAs' product offerings include; anti-virus, security, network management, and help desk software. These products are offered as a complete suite known as Net Tools. In addition, NETA offers consulting services to its clients, which in 1997, accounted for 17% of the company's revenues. Some of NETAs' more significant competitors include; Computer Associates, Remedy Corporation, IBM, Hewlett Packard, and Checkpoint Software.
The network software industry is undergoing a considerable amount of consolidation, with NETAs' recent acquisitions. In August of 1998, NETA acquired Dr. Solomon in exchange for about $700 million in stock. Dr. Solomon is the leading anti-virus vendor in the United Kingdom and the acquisition should enhance NETA's presence in the region, as well as the rest of Europe. NETA also agreed to purchase Cybermedia, a leading software utility provider for about $130 million in Europe.
NETA is benefiting from the explosive growth of the NT operating system sold by Microsoft Corporation. Microsoft is set to release version 5.0 of this product in late 1999. Microsoft NT software is targeted for the small to medium size business market, with aspirations of acceptance as software reliable and capable enough to run large computing jobs. Microsoft is betting its future on the NT product. Bill Gates' vision is to move all Microsoft customers to the NT platform, including individuals running Microsoft's Windows desktop operating software. By the year 2000, Microsoft will only produce a NT version of its operating software for running computers. This is fortuitous for NETA, as the company dominates the market for security, anti-virsus network management, and help desk software running on the NT platform.
NETA maintains the leading market share in two of the areas of network management software. The company's Sniffer product has an estimated 76% market share of the software needed to manage and analyze high and midrange networks. NETA also dominates the market of anti-virus software with an estimated 60% market share. Both of these markets are expected to do well, as more and more companies move to expand their networks and more and more information moves across corporate networks.
NETA trades at a reasonable multiple, especially given the prognosis for demand for its products. The stock currently trades in the mid 50s, or at about 30 times fiscal 1998 estimated earnings of $1.50. However, the stock trades at only 22 times next earnings estimate of $2.20, versus an expected 35% growth in revenues and earnings. In its most recent quarterly report, NETA reported earnings of 41 cents, a share excluding special charges on a 33% revenue rise to $242.4 million. NETA's balance sheet is clean, with no long-term debt and over $120 million in cash.
If you are looking to purchase a network software company, with a dominant market position trading at a conservative multiple relative to its growth rate, then buy NETA at or below $60. We have set a one year price target of $100 for the stock.
To get a better perspective on how oversold NETA really is, you only need to compare with ISSX which is in a similar business.
Also here is a link that analyzes NETA sales and company's rapid increase. A close analysis of the March quarter show that it has historically been the slowest quarter. The announced expectation of this year's March quarter revenue of $245-$250 million compared to last year's March quarter revenue of $188.4 million is still a whopping 36% year over year growth. This clearly indicates that there is no ceasation of demand for NETA's products. And that investors are mistaking only seasonal fluctuations as some weakness in the product line. New and additional suites of applications were just announced at the beginning of this week.
We believe today's and yesterday's selling as part of a crowd mentality panic selling driven by undue fear than reasoned thought. This has created an unbelieveable value. Those who brave the panic will undoubted have made a coup dae tah here today.
4-8-99 We believe Networks Associates, symbol NETA is being tremendously discounted at these levels. We have essentially sold this week's first recommendation ASDV just so we could raise more cash to turn around and buy NETA. NETA is a star stock amongst other great software stocks like MSFT, ORCL, and CA. Even with the reduced earnings, the company's year over year earnings and revenue is growing at double digits. Even at its revised estimates, NETA would be trading at only a PE of 13 in an industry that sees PEs in the range of 50-80 times earnings. NETA is a long term buy.
4-7-99 Today we purchased a significant number of Networks Associates inc., symbol NETA. A once in a while event occurred today, a quality stock was on sale. NETA, was that stock. This stock is the leader in its category with a history of solid performance. We feel strongly that none of their business has gone away, shall we just say hidden from this quarter. We see this as a terrific buying opportunity. Long term prospects are strong and we expect a short term recovery to the low $20's within days. Rating = Strong Buy (esp. at these discount prices)
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