McAfee's McTentative McBuyback

Despite all the talk of constriction in the credit markets, Wall Street's buyback binge continues. It's not just defense contractors like General Dynamics (NYSE: GD), L-3 Communications (NYSE: LLL), and Northrop Grumman (NYSE: NOC) doing the buying -- software firms are getting in on the action, too. For example, last week, the board of directors at McAfee (NYSE: MFE) hinted that it just might be interested in its own shares.

Its stock-option backdating shenanigans finally resolved, McAfee announced on Friday that it is once again current on its SEC filings. How it can keep straight this time is anyone's guess, but now that those pesky accountants have ceased their nattering, management is feeling frisky, and it's in the mood to begin buying back stock.

Or not. Judging from its past practices, McAfee may give us plenty more opportunities to mock it if we wait long enough. Today, we're focusing on just two questions: Can it afford the buyback, and even if it can, is the price right?

Can it pay?
Yes. McAfee can almost certainly afford almost any buyback of reasonable magnitude it chooses to implement. According to these now-current SEC filings McAfee's so proud of, the company has more than $870 million in cash and equivalents in its kitty, and another $673 million in long-term marketable securities. With no long-term debt to worry about, that's good for an easy $1.5 billion in buybacks right off the bat. Moreover, by my calculations, McAfee has generated roughly $350 million in free cash flow over the last 12 months, further expanding the possibilities for a buyback.

Should it pay?
Not at this price, no. Comparing McAfee to its virus-eating peers, the company's shares don't look obviously undervalued.

	P/E	Price-to-Free Cash Flow	Projected Growth Rate
McAfee	33	17	14%
CA, Inc. (NYSE: CA)	48	11	12%
Microsoft (Nasdaq: MSFT)	24	20	12%
Symantec (Nasdaq: SYMC)	48	10	12%

From a PEG perspective, not a single company in this space looks attractively priced. Fortunately, when you look past the GAAP accounting arcana, these companies all look much more reasonably priced based on their ability to generate cash profits.

Now, the good news here is that among these four companies, only Microsoft sells for a higher price-to-free cash flow ratio than the broader market of S&P 500 stocks, while growing about as fast as the average. Of course, Microsoft also does a whole lot more than just Internet protection. (In fact, a cynic might say that the company that brought us the "Blue Screen of Death" made Internet security a bit too much of an afterthought.) Its status as a Computing Age icon, combined with its broad stable of businesses, arguably earn Microsoft its premium.

Meanwhile, pure-play Internet security specialist McAfee is cheaper than the average S&P 500 stock, but not significantly so. While your average S&P sells for a price-to-free cash flow-to-growth ratio of 1.4, McAfee gets a 1.3.

Foolish takeaway
To this Fool's mind, that may make McAfee relatively "cheaper," but not objectively "cheap" -- and thus does not justify buying back stock at today's price. A better idea, perhaps, would be for McAfee to buy itself some more growth (although it's already the fastest grower in the group), or even better, institute a dividend (it and Symantec are the only two companies in the group that don't pay one).

In any case, though, what the numbers are telling me is that buying McAfee stock is not the way to go -- for McAfee, or for you.

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