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Monday, July 31, 2006

McAfee Will Rise Again

Stocks: (MFE)(SYMC)

McAfee’s stock has been beaten like a red-headed mule. The company, best known for its computer anti-virus software, has been dogged by a history of poor corporate governance that has lead to financial restatements and the ouster of senior management for inflating revenue from 1998 to 2000. The company was known as Network Associates until recently.

McAfee announced its second quarter results with the proviso that they may have to be revised due to improper accounting for back-dated stock options. The company also said that previously issued financial statements “could not be relied upon”. That is, of course, a lot of bad news.

The company’s results were not half bad. Revenue rose to $277 million from $245 million a year ago. Net income was off to $31 million compared to $42 million in the period a year ago. The company’s cash position was just shy of $1.2 billion. McAfee expected revenue in Q3 to be flat with Q2 revenue. However, that would be a healthy increase from the 2005 third quarter when revenue was $253 million.

A little over a month ago, Friedman Billings Ramsey had an “outperform” rating on the stock with a price target of $35. The firm pointed to healthy cash flow, a “compelling valuation” and the launch of the new Falcon consumer anti-virus line as reasons to look at the stock. It is easy to look at the Friedman Billings analysts as dupes and lamebrains, but, in the long run they may be right.

The McAfee announcement of a less than stellar second quarter and possible restatements dropped the stock to below $21, before it closed at $22.35. This is well below the twelve-month high of $33.24. The company is actually doing relatively well. The last four quarters have shown revenue increases over the immediately previous quarter. The company had positive operating income in each of these periods.

McAfee is in a business that is likely to continue to growth as the number of threats to computer security expands. Aside from consumer PC anti-virus products, the company has carrier class security services used by large businesses and the government.

Because of the company’s revenue trend and the value of its products to both consumer and enterprise computer systems, McAfee is likely to be in reasonable shape to continue to increase it top line over the course of the next several year. With the company’s cash backed out, McAfee has a market cap of $2.5 billion against a revenue run rate of $1 billion.

Companies that get hit with earnings restatements and SEC investigations usually fall into one of two categories: those they are destroyed by the actions and those that pass through them with some distraction but move on to continued success. McAfee looks like it falls into the latter category.

Douglas A. McIntyre can be reached at He does not own securities in companies that he writes about.

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