Vasco Data Security Has Near 100% Upside, Sidoti Analyst Says

Shares of Vasco Data Security, an IT security provider, peaked at $35 per share in June and then declined 49 percent, underperforming the 12 percent decline in the Russell 2000 index over the same time period. In a report published Tuesday, Stan Berenshteyn of Sidoti & Company initiated coverage of Vasco with a Buy rating and $34 price target as the "increasing quantity and sophistication" of data breaches will "encourage a greater dependence on security" by the end user and augment the frequency of client upgrade cycles. Berenshteyn continued that the decline in Vasco's stock reflects the company's "extremely lumpy" core business as its banking clients typically upgrade their security features every four to six quarters. However, the analyst suggested that the current environment is different and demand for securing digital assets is expected to grow at a pace that hasn't been seen before. Berenshteyn offered three factors to support a surge in demand for Vasco's products and services: 1) the quantity and sensitivity of digital assets is growing, 2) the sophistication and frequency of data hacks is growing, and 3) favorable regulatory requirements. Berenshteyn pointed out that Vasco has a "favorable" tax rate structure in the 14 percent to 17 percent range through 2017 (compared to the group average of 27 percent) given its revenue mix is "greatly skewed" to international sales. In addition, the company has a "strong" balance sheet with $157 million in cash and equivalents ($3.95 per share) with no debt which allows the company to "hoard cash" until an "appropriate" acquisition opportunity presents itself. Finally, the analyst's $34 price target is based on a 25x multiple to his 2017 earnings per share estimate of $1.09 (plus $7.01 per share in cash) – a multiple that is in-line with a five-year earnings per share compounded growth rate.