I admit I am usually a bit slow. But like the tortoise, I get to the finish line, and sometimes I win. I'll tell you my firsttwo articles were warm-ups -- you can decide whether that's true. But after some more digging, thinking, and reading email responses, I'll share my final thoughts about Secure Computing (NASDAQ:SCUR).

Once two responders reminded me about the nature of Secure's selling and marketing costs, my brain finally put all of the pieces together. Comprised mainly of salaries, commissions, and benefits, they act like fixed costs. In order to have net income on the bottom line, the company has to overcome these costs.

Think of airlines. They have huge fixed costs (planes, fuel, airport charges, and salaries) and little variable costs (the peanuts and Coca-Cola (NYSE:KO)). Airlines have to sell enough seats to cover their fixed costs before they can turn a profit. US Airways (NASDAQ:UAIR) decided to get really stupid and add a bunch of debt -- an additional fixed cost -- to its industry-high cost structure. It went into bankruptcy when revenues declined. Fortunately, Secure Computing's management understands the leverage effect of its fixed costs and carries no debt.

Last quarter, the leverage worked against it when sales to the government came in below expectations. And the leverage effect is shown as revenues declined 7.2% to cause a 33% decline in EPS. See. I told you I should have caught this earlier.


Analysts revised 2004 EPS estimates to $0.31 per share (based on an average of four projections). At the July 14, 2004, closing price of $6.81, this implies a forward-looking P/E ratio of 22. Assuming a growth rate of 25%, which is below analysts' previous estimates of about 35%, the PEG is 0.9.

Competitors Websense (NASDAQ:WBSN), RSA Security (NASDAQ:RSAS), Symantec (NASDAQ:SYMC), and Check Point (NASDAQ:CHKP) carry forward-looking P/Es of 36, 40, 27, and 23, respectively. They also carry PEGs of 1.2, 1.3, 1.2, and 1.6 based on their estimated growth rates.

I don't think markets are efficient. The highs are too high, and the lows are too low. Relative to its peers, the stock looks like it may be undervalued. And if it can get those lost revenues back, Secure Computing will feel the revenue leverage benefit on the upside. I must remind you that the risks are real and center on whether or not the sales problem is systemic. Regardless, I am still content to sit on the sidelines given my penchant for higher margins of safety.

Fool contributor David Meier does not own any of the stocks mentioned.