Description

Leading software company trading at private-market valuations with attractive margin of safety levels.

Great Business: Network Associates (NETA) is a leading supplier of security and availability solutions for mainly corporations. NETA has four business units: Anti-virus (50% of revenues growing +15% to +20% per year); Sniffer Technologies--which is a network analyzer (30% of revs., 20% growth); Security--like firewall protection (10% of revs., 15% growth) and a Help Desk division (10% of rev., 40% to +50% growth). NETA is also a majority owner of McAfee.com (MCAF)--largest application service provider on the Web. MCAF has grown faster than another subscription service. The way it works is that individuals can visit McAfee.com and have their laptops scanned, cleaned and checked for viruses. Customers pay a subscription fee. NETA’s Sniffer Technologies business is also mission critical--it allows most companies’ networks to operate effectively (just ask your local IT professional). Read annual report or post question on message string for more details but the bottom line is that virus protection has great economics and has very high barriers to entry (three are only three players in this space: NETA has “McAfee,” Symantec (SYMC) has “Norton Anti-Virus” and a Japanese company called Trend). Network Associates is in a business that is clearly not getting the valuation it deserves. The growth in the business is great but the future will be in wireless and NETA is leading the way. NETA will be spending 17% of every dollar to develop product for the wireless, broadband and appliance markets. In fact, NETA was the first to discover and find a cure for a virus that attacks the Palm and cell phones. That’s the future and the growth opportunity is enormous.

Cheap Valuation: NETA will generate $800M and $1Bn in revenues for fiscal years 2000 and 2001. EPS is estimated at $1.01 this year and $1.22 next year. EBITDA should come in at $270 and $320 this year and next. NETA’s enterprise value is currently $2bn. At $16 per share NETA, is trading for fiscal 2001 at 2x revs, 6.4x EV/EBITDA and 13x P/E……HOWEVER, remember that the company owns an 83% stake in McAfee.com—with ridiculous valuations, of course—but MCAF is trading at $7 per share at 52 week lows. NETA’s stake is worth ~$250M. Including this stake this yields an adjusted enterprise value for NETA of $1.8Bn. On an adjusted basis, NETA is therefore trading on 2001 numbers at 1.7x revenues, 5.6x EV/EBITDA and 12x P/E.

Strong Balance Sheet: As of the 3rdQ NETA has $800M in cash (despite spending $30M in a buyback) and $400 in debt—contributing to a net cash position per share nearly ~$3 per share. Even if you assume McAfee.com is worth nothing the company still looks attractive for a few reasons: the aforementioned valuation, the fact that NETA has a 50% market share in corporate anti-virus and 50% in network analyzers, a strong balance sheet and given the sheer economics of this business (i.e., cash flow generation).

Based on reasonable, historical valuations, NETA (excluding Mcafee.com) is worth at least $30 per share.

Catalyst

While there are clearly few catalysts to this story, their degree of potency questionable.
1) NETA will be doing an equity carve-out of MyCIO.com (could be worth $1 per NETA share)
2) The company will be doing an equity carve-out of their Japan subsidiary (this could be worth $2-$3 per NETA share)
3) NETA has a $100M venture fund in the company. Has several investments in start-ups (who knows what that is worth—but simple math suggests at least $1)
4) McAfee.com could rebound given that it’s the best application service provider on the Web.