Secure Computing: Thank You, Panic Sellers

I should be crying today. Take a look at what's happened to some of my best tech stock holdings so far today.

Company

Change

Akamai (Nasdaq: AKAM  )

(1.6%)

Seagate (NYSE: STX  )

(1.3%)

Secure Computing (Nasdaq: SCUR  )

(7.9%)

Taiwan Semi (NYSE: TSM  )

(2.3%)

Rule Breakers pick Akamai has fallen nearly 16% since releasing a strong first-quarter report that, apparently, wasn't good enough for investors. And today, Secure Computing appears to be suffering a similar fate.

However, I'm thrilled. Secure, which sells products that combine hardware and software to sniff out and swat digital pests before they bite, grew revenue 42% on a non-GAAP basis in its 2007 first quarter. (Secure uses non-GAAP measures to account for the impact of stock-based compensation and acquired deferred revenue.)

Per-share earnings fell to $0.05 from $0.15 the year before, but that won't tell you much about the operating effectiveness of this business. Owner earnings, however, will. That's a metric that measures true profitability by counting the cash that flows from core operations before most working capital changes.

On that basis, Secure earned $1.7 million, or $0.02 a share. What's that? That doesn't seem like much? Rewind 12 months. A year ago, Secure bled $2.6 million in owner earnings.

Thank deferred revenue for the improvement. Upfront payments for multimonth and multiyear service contracts allow Secure to produce generous amounts of cash flow, which, in turn, aid the balance sheet. That's how Secure was able to pay off $12 million in acquisition-related debt in the first quarter.

If there was a genuine worry in the report, it's with billings. Secure's backlog of to-be-serviced contracts improved by $66.3 million. Though a 67% increase over last year's Q1, it was short of the $68 million to $70 million that management had expected 90 days ago.

But that's a minor complaint. More important is that Secure seems on pace to sustain massive owner-earnings growth. Do the math. Last year, it transformed 24%, or $42.8 million, of its revenue into owner earnings.

Finance chief Tim Steinkopf told me this morning that the business is on pace for similar margins in 2007. If so, Secure could be on pace for at least 35% growth. But the stock, as of this writing, trades for just 12 times its trailing owner earnings. That's an outrageously low multiple that seems, to me at least, destined to expand. 

So keep selling, stockinistas. My retirement fund needs cheap growth stocks, and Secure Computing is as secure a bargain as I've found.

Secure your portfolio with Foolishness:

Secure Computing and Akamai are Motley Fool Rule Breakers picks. David Gardner and his team of analysts have unearthed four stocks that have more than doubled in the first two years of this market-beating service, including Akamai. Want the names of the other three? Click here to test-drive Rule Breakers for 30 days. There's no obligation to subscribe.

Fool contributor Tim Beyers, ranked 4,094 out of more than 28,000 rated players in our Motley Fool CAPS investor intelligence database, is a sucker for growth stocks and a regular contributor to David's Motley Fool Rule Breakers service. Tim owns shares of Akamai, Seagate, Secure Computing, and Taiwan Semiconductor. All of his portfolio holdings can be found at his Fool profile. His thoughts on growth stocks, Foolishness, and investing in general may be found in his blog. Microsoft and Intel are Inside Value picks. The Motley Fool's disclosure policy is a rebel on Wall Street.


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