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Diederik Quint
New York
Story Stocks
27-Oct-04
15:19 ET (27-Oct-04)
Mike Tarsala's TechWatch: It’s not often that I see a good “buy and hold” stock idea, but I think I found one in Vasco Data Security (VDSI), a one-time dot-bomb that’s posted a profit in seven straight quarters of profit and is now one of the least-expensive yet fastest growing companies in the hot computer security sector.
Vasco’s security solutions sell very well among banking customers, especially in Europe, and the company sees potential to increase sales among U.S. banks. The company competes with RSA Security (RSAS) in the market for two-factor authentication products (in Vasco's case, both hardware and software) that verify the identity of a person signing on to a computer network.
Let’s say you as a banking client sit down at a remote PC to make a withdrawal from your account. You enter your username, and instead of entering your same old password, you touch a button on one of Vasco’s hardware devices that randomly generates a one-time password for you. You punch it in, and at the very same time, there’s an identical piece of software running at one of the bank’s servers generating that same number. Only when those two numbers match are you granted access to your account, boosting the level of security for both you and the bank.
Vasco says it’s the market leader with about 300 banks as customers, where the company gets a significant amount of repeat business. It also has 1,400 corporate customers, ranking second to RSA. Vasco added 48 new banks as customers in Q3, and 299 new corporations. What leads me to think the growth will continue is that the company is planning to increase its employee base to 120 from about 80 by the first quarter of ’05, in an effort to keep up with demand.
“If you can appreciate the trials and tribulations this company faced in 2000 and 2001, the fact that they are now talking about headcount additions of that magnitude tells me they see an opportunity globally to drive a lot higher revenue growth rates than people have modeled for the next couple of years,” said Frederick Ziegel, analyst with Mackinac Research LLC-Soleil.
Vasco says it’s getting more aggressive with its marketing, the company is attending more trade shows than last year, and expanding its U.S. presence with a small Boston office. Customers seem to be responding, due to increasing concerns about computer phishing, where hackers create a replica of a bank or other Web page to fool you into submitting your password or financial data.
Looking ahead, Vasco has a large opportunity to expand sales to its existing banking customers. It has a shot at boosting revenue by selling devices to companies that need to securely communicate with other companies. In the next few years (one insider says he expects “big revenue from that part of the business in late 2005 to early 2006), Vasco expects to build up its consumer business by offering strong authentication products for online credit card purchases. And in general, the company has room to increase its dealings in the U.S. (Sales in the U.S. account for about 12% of total revs – a number that could grow, considering many international cos do half their business in the U.S.)
The company’s biggest challenge seems to be that it’s smaller than rival RSA, a company that all but wrote the book on two-factor authentication. Vasco doesn’t have the same brand recognition (and the company’s name isn’t very palatable, either.) That and Vasco had about $10 mln cash at the end of September – which is a lot more than it had several quarters ago, but the company could probably expand faster if it had more money.
As with all investments, there’s a tradeoff here between risk and reward. But I like that Vasco trades at about 18 times forward EPS estimates, vs. an average of 30Xs for other stocks in the sector, including SYMC, ALDN, VRSN, RSAS, MVSN and VRNT. What’s more, Vasco has better projected earnings growth than ALL of those security companies. It’s under accumulation, and has seen the strongest rise in volume over the past 50 days among stocks in its group.
There doesn’t seem to be much technical support for the stock at its current level, so trading it with a stop at about 8 percent less its current price might be a good idea. There’s resistance at $3.50, but if Vasco can break through it, and I think it can at some point in the next few months, point-and-figure analysis suggests the stock could more than double over the next 12 months – possibly to $8.50.
Insurers may have to spend more on software
Marsh Mclennan, the world’s largest insurance broker, said on a conference call today that to further ensure compliance with the New York attorney general and other regulators, it will record all telephone calls made at its central facility and monitor all e-mails, much like the investment industry has done for years -- raising speculation they may need to buy software to accomplish that task.
A few quick calls to analysts suggests there are many brokers that have yet to purchase such products, creating a potential opportunity for a handful of publicly traded software companies. (Software salesmen, were you listening?)
Aside from mega-companies EMC and Veritas Software (VRTS) that are probably too big to be a trading opportunity on Marsh’s announcement, there might be three publicly traded companies that could benefit by increasingly targeting insurance broker compliance.
Tumbleweed Communications (TMWD) stands out. The company specializes in software that can monitor, filter and archive e-mail sent by and from employees, partners, suppliers and distributors. We weren’t able to pull up EPS estimates for the company -- probably because there aren’t any. The company lost $0.02 ex items in Q3, but that was seen as a decent quarter. Technically, the chart's stock looks good. There’s no major support for the stock at its current price of about $3.60 a share, but it doesn't hit major resistance again until about $4.50.
Zix (ZIXI) is also a possible play. The company specializes in software for secure messaging and content filtering, but analysts say there’s also an archiving component to the software maker’s wares. Zix has been heavily focused on the software business, but a company spokeswoman said the company is just starting to target insurance. One word of caution -- although Zix is priced at about a third of its April highs, it still has about 41 percent short interest.
Entrust (ENTU) is also a possible beneficiary from more insurance broker business. About 30 percent of Entrust’s revenue is coming from secure messaging – which includes the archiving function. The stock has had a good run the past two weeks. It might struggle between its current price of $3.40, but it does show potential for upside. There seems to be solid support at about the $2 level.
Redback's Run
Redback Networks (RBAK) had a nice run today, up about 11 percent, based partly on the most significant insider buying of company shares so far this year.
It wasn't a mega-purchase, but a company director bought about 50,000 shares, according to SEC filings. Also, the company's chief executive picked up about 25,000 sh