Barclays Downgrades FireEye, Prefers Palo Alto Networks & Fortinet

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In a report published Friday, Barclays analyst Saket Kalia mentioned that spending growth should continue in security, backed by a 48 percent surge in the number of cyberattacks in 2014. However, given the re-rated valuations, the sector has become “tougher to own.”

  • Kalia maintained an Overweight rating on Palo Alto Networks Inc PANW, while raising the price target from $178 to $210.

“We believe PANW can grow billings 30%+ through FY17 driven by 15-20% growth in product as share gains continue and 35-40% growth in recurring billings as we estimate there are ~$500M in renewals due in FY16 and ~$750M due in FY17,” Kalia said.

The recurring billings should support revenue growth of 30-35 percent. With this, Kalia estimated a 4Q16 exit operating margin of 22 percent, since renewals are less sales intensive. “Putting these two items together, we forecast $632M in FCF in FY17, providing valuation support for an outperforming stock,” the report added.

  • Barclays initiated coverage of Fortinet Inc FTNT with an Overweight rating and a price target of $50.

Kalia expects Fortinet to generate 20-25 percent revenue growth through FY16, backed by “continued share gain in the Unified Threat Management (UTM) market combined with growing share in enterprise security, where we think FY16 could benefit from a new ASIC release.”

Following the increase in spending, leverage could return in FY16, driving free cash flows of around 300M. “While FTNT competes more on its performance/value equation rather than as a technology disruptor, we believe the stock has the cash flow and catalysts to support solid growth and reasonable valuation, which are increasingly difficult to find in this market,” the report mentioned.

  • Kalia initiated coverage of Check Point Software Technologies Ltd. CHKP with an Equal-Weight rating and a price target of $90.

Check Point is the largest pure-play security company by market share. “However, given its already large share of the market and share gain by competitors like PANW, its share has been flattish since 2011 at ~15%, so we estimate ~8% annual revenue growth through FY16,” the Barclays report stated.

Check Point could generate 7-12 percent EPS growth over the next couple of year, backed by peak margins of 55-60 percent and 3-5 percent growth from share repurchases.

  • Barclays downgraded the rating on FireEye Inc FEYE from Overweight to Equal-Weight, while raising the price target from $47 to $56.

“FireEye’s networked installed base and services business create a virtuous circle of threat intelligence that gives their tools high efficacy and makes the company a unique asset. Moreover, as management appears to be focusing on profitability and cash flow, we set our near term EPS and cash flow above guidance,” Kalia wrote.

The analyst added, however, that even with 25 percent revenue growth, 30 percent cash flow margins, and a 30x multiple, the price target is estimated at $56 PT, which warrants the Equal-Weight rating.

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