ArcSight (ARST) Showing Growth Rates Of 30%-plus: Stifel Nicolaus Senior Analyst Covers The Software Sector In Detail
March 8, 2010 - The Wall Street Transcript has just published Business & Application Software Report offering a timely review of the Multimedia Software sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
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Todd C. Weller joined the Stifel Nicolaus research team in connection with Stifel's acquisition of Legg Mason's Capital Markets Group in December 2005. Mr. Weller covers the software and Internet infrastructure sector, with a current focus on data center/hosting, health care information technology, infrastructure software and security. In 2009 the Financial Times/StarMine ranked Mr. Weller first for earnings accuracy and third for stock picking in the software industry, and second for stock picking in the health care technology industry.
Mr. Weller also placed second for earnings accuracy in the software industry, in the 2008 Financial Times/StarMine analyst awards. He has a B.A. in economics, with certificates in finance and management science from the University of Maryland, Baltimore County, and an MBA from the University of Maryland at College Park. Mr. Weller is a CFA charterholder.
TWST: Let's start on the security side. What's new or different in this space at this point?
Mr. Weller: Security is again one of those areas that seems to be more sexy than it is. It's always a top budget item. You get kind of a lot of headlines with the recent attacks on Google (GOOG) and other companies. But underneath that, you have a market that has a fair degree of maturity to it. A lot of companies have anti-virus software on their desktops; a lot of companies have firewalls; a lot of companies have intrusion detection.
I think what you're going to see this year will be replacements of some of those firewalls and intrusion detection systems, as they've gotten too old, business traffic has increased. Now there are newer areas within security where there is more rapid growth. For example, in the area like security information and event management, where a company we don't cover right now, but a company called ArcSight (ARST) plays, that should be a real interesting area.
TWST: What is growth like in this space?
Mr. Weller: This is where it can really vary. If you look at companies like Symantec, which is one of the bigger security companies, right now they're not really growing top-line revenue. In the security space, it would be low-single-digit growth if you look at McAfee, for example. On an organic basis, if you're looking at McAfee, it did post kind of low-double-digit revenue growth; Check Point (CHKP), 10%-type growth. Those are some of the bigger security companies. But then you've got companies, like a Sourcefire (FIRE) or an ArcSight, where you can see growth rates of 30%-plus. So there is a dichotomy.
TWST: You mentioned a couple of names here. Are they interesting at this point, or are they fully reflecting the opportunities in the virtualization space?
Mr. Weller: We have been and continue to be pretty cautious in this sector with respect to recommendations. Like I said, VMware is kind of a - there is a tremendous scarcity element that goes along with VMware, and it's always had a valuation that always kind of looked expensive, and so it's been a tough stock to kind of figure out. Citrix, we're concerned again that expectations are a bit high on the desktop virtualization side, and so we are a bit cautious there.
On Red Hat, that stock has benefited very well, too, as there has been - I think a lot of investors have rotated into companies that benefit from improving server shipments, and Red Hat is one of those plays. So that's another expensive valuation. So we do in that space because there is a company we cover called Quest Software (QSFT), they do more of traditional systems management, managing Oracle (ORCL) databases, Microsoft infrastructure, and they have a small business managing virtual infrastructures.
TWST: Who would you look at in this space, if anybody, at this point?
Mr. Weller: We've had a conservative posture in this space, and we have six companies we cover, or six stocks. We have two rated "buy," the others rated "hold." Our favorite name in the group is Eclipsys (ECLP), which sells to hospitals. And we think that there you have a very attractive valuation. They'll benefit from the stimulus, given they have a good installed base.
And there is also a company-specific catalyst, with a new management team on board there that is looking to improve execution and improve the profitability profile of the company. The other stock we like is Allscripts (MDRX). We think they are very well positioned in the physician side of that market, where there is going to be a lot more growth because of the lower penetration rate.
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