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Viruses Beware: Cyber Security Spending Is Back

3 August 2013 in Trading Ideas

It seems one of the old-guard tech companies may have just shown an optimistic spotlight on an oft-overlooked sector.

Cisco made a few ripples last week by announcing it planned to acquire cyber security software maker Sourcefire for $2.7 billion. Just days later, Sourcefire offered quarterly results that suggested what all the fuss was about: the company’s revenue jumped 29% to $65.1 million, and its earnings of 20 cents a share beat Wall Street’s expectations by a nickel.1

Those figures dovetailed well enough with results earlier this month from larger peer Check Point Software, which reported double-digit growth in North American sales and overall sales and profit numbers that beat consensus estimates. These one-two punches of financial announcements prompted FBN Securities analyst Shelby Serayfi to declare that the security segment of the tech market “rebounded quite nicely” in the second quarter of this year.

cyber security motif The result has been a lift for many shareholders of security software firms. Our Cyber Security motif, a portfolio of 15 sector-related stocks, has gained 17.4% in the past month. The S&P 500 has risen 6.0% in that same timeframe.

So far this year, the motif is up 35.5%. The S&P 500 has increased 18.3% in 2013.

The sector appears to have a couple of things going for it right now. For starters, many onlookers believe the macro picture looks less bleak. As FBR & Co. analyst Daniel Ives told Investors’ Business Daily, this year’s first quarter started out tight in software and security spending. Part of that was business related to the federal government, which, as you may recall, was stuck in funding uncertainties due to the federal budget sequestration fight.

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Sourcefire, for example, saw its federal-sector revenue fall 37% in this year’s first quarter. In the second quarter, it rose 57%.

But the second piece to the sector’s current health may be that Cisco’s purchase of Sourcefire is expected to be replicated by other large-cap tech firms. In a recent research note, Ives wrote, “We view this morning’s news [Cisco’s acquisition] as ‘game changing’ for the cyber security space as we expect a surge of consolidation to take place over the next 12 to 18 months.”2

Ives added that larger technology players such as IBM, Juniper, Symantec, and EMC could look to acquire smaller security players to help drive growth given the high priority security has in IT spending.

Of course, the sector is hardly in the clear, as federal sequestration concerns toward the end of the year could once again become a headwind. However, investors who waited it out the first time are finally being rewarded.

1Donna Howell, “Sourcefire Earnings Herald Security Spending Rebound,” Investor’s Business Daily, July 29, 2013, http://news.investors.com/technology/072913-665578-sourcefire-network-security-earnings-show-spending-rebound.htm?ven=yahoocp,yahoo.

2Nicola Leske, “Cisco to buy Sourcefire, more network security deals seen,” Reuters, July 23, 2013, http://finance.yahoo.com/news/cisco-buy-security-software-maker-121005807.html, (accessed July 30, 2013).

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