Cyber Attack Defense a New Growth Industry? 5 Stocks to Watch

Cyber attacks against Google (GOOG) have recently been in the news. Yahoo (YHOO) and other companies have been attacked, as well. Microsoft (MSFT), in turn, has gone to court to attack a network of malicious botnets.

With all this activity in the cyber security arena, it is worth investigating which companies are at the forefront of the battle against hackers. With a wave of concern over hacking attempts, there should be some good investment candidates in the network security sector.

Background --

When I talk about security I'm talking about intrusion detection and protection. An intrusion-prevention system (IPS) is an inline security device that performs deep-packet inspection to identify and block malicious traffic. IPSs are considered an improvement over intrusion-detection systems (IDS), which are passive devices that simply identify an attack but take no action to block it. IPSs are designed to respond in real time to attacks by dropping data packets deemed malicious.

There several ways that intrusion detection and prevention is accomplished:

• Host Intrusion Detection and Prevention: Businesses add these systems to individual critical hosts or devices residing on the network. This type of IDPS monitors both inbound and outbound packets — but only through the device with which it is associated.
• Signature-Based Intrusion and Prevention: This type of IDPS is useful for detecting viruses and other types of malware. The product compares all of the packets that flow through it with a database of known threats. Like anti-malware offerings, a signature-based IDPS is only as good as the information it uses, meaning that technology is vulnerable to "zero day" security events. On the other hand, a signature-based IDPS is a very reliable way of defending a network against known threats, which constitute the majority of network perils.
• Anomaly-Based Intrusion and Prevention: One could describe this kind of IDPS as being naturally suspicious. That's because an anomaly-based IDPS is always looking for something out of the ordinary. The system continuously scrutinizes network traffic and compares it against an established baseline. Any detected deviations from "normal" performance in terms of bandwidth use, ports accessed or devices connected will cause the IDPS to issue an alert and take proactive steps to ensure the network's health. This type of firewall can be particularly effective in helping business cope with DDoS (distributed denial of service) attacks, when large numbers of computers are recruited to join together and bring down a Web site.

State of the industry --

There were a good number of pure play companies in the cyber security space in years past. Over time, however, many of the companies were acquired or combined with each other. Today, we see that Cisco (CSCO) has absorbed Entercept, Wheel Group and Air Force. IBM (IBM) has acquired Internet Security Systems, also known as ISS. Enterasys now owns Network Security Wizards. Symantec (SYMC) acquired Axent, provider of the Net Prowler product. Juniper (JNPR), Tivoli and Computer Associates have all bought various IDPS companies. The upshot of all this acquisition activity is that IDPS has become just a small part of some very large companies.

So who's left? In the table below, I present five companies that are still independent, publicly traded and reasonably pure plays in the IDPS sector.

	SonicWALL	Check Point Software Technologies	Fortinet	Sourcefire	Radware
	SNWL	CHKP	FTNT	FIRE	RDWR
Valuation Measures
Market Cap	483.24M	7.06B	1.14B	724.23M	341.93M
Trailing P/E	37.59	20.03	21.83	84.7	N/A
Forward P/E	18.18	13.66	46.08	38.36	22.64
PEG Ratio (5 yr expected):	1.49	1.34	3.06	2.27	0.81
Price/Sales (ttm):	2.37	7.59	4.47	6.93	3.15
Price/Book (mrq):	1.58	3.03	7.91	5.58	2.28
Enterprise Value/EBITDA (ttm)3:	13.317	12.681	27.714	55.626	-275.185
Profitability
Profit Margin (ttm):	6.56%	38.67%	23.87%	8.58%	-5.45%
Operating Margin (ttm):	8.26%	45.88%	10.05%	8.01%	-6.52%
Income Statement
Revenue Per Share (ttm):	3.72	4.415	9.574	3.91	5.768
Qtrly Revenue Growth (yoy):	-0.20%	25.10%	19.70%	37.20%	29.10%
Diluted EPS (ttm):	0.24	1.69	0.78	0.32	-0.31
Qtrly Earnings Growth (yoy):	43.60%	26.70%	453.20%	193.90%	N/A
Balance Sheet
Total Cash (mrq):	200.15M	884.00M	260.31M	53.07M	59.09M
Total Cash Per Share (mrq):	3.69	4.228	3.897	1.968	3.129
Cash Flow Statement
Operating Cash Flow (ttm):	35.85M	548.69M	62.32M	20.16M	N/A
Levered Free Cash Flow (ttm):	10.82M	430.93M	26.37M	-21.91M	N/A

The data above is from Yahoo! Finance as of Friday, March 5. It shows that all but one of these companies is profitable and none of them are particularly cheap.

Here is a quick look at each company.