Sourcefire Is a Source of Excitement

Offering earnings guidance above analyst expectations is obviously a bullish sign, as over time, earnings growth follows sales growth. And when a company predicts greater sales or profits, we expect its stock price to soon follow.

Earlier this month, network security specialist Sourcefire (FIRE.DL) said third-quarter adjusted earnings would be slightly higher than the $0.19 to $0.21 per share range it previously gave back in July, though further details weren't forthcoming.

Now don't go blindly buying on its bullish report -- you still need to get all the facts. Use the announcement as a jumping off point for additional research.

Sourcefire snapshot

Source: Finviz.com. N/A = not applicable; Sourcefire doesn't pay a dividend.

Talk to the hand
Those higher expectations weren't enough to shield Sourcefire's stock from the weaker-than-anticipated outlooks from industry peers Fortinet (FTNT -0.69%) and Check Point Software Technologies (CHKP -0.10%). Shares slid 12%, though they did bounce back 6% the next day.

Like Sourcefire, which is expecting a fairly robust third quarter, both companies issued results that were relatively strong as enterprise-level companies adopted their technologies, but were found somewhat lacking in maintaining that momentum going into the fourth quarter. Fortinet guided to earnings of $0.15 per share where analysts had expected $0.16, and Check Point forecast EPS of $0.83 to $0.91 per share while analysts were looking for $0.90.

As seems to be the case across most industries, Europe is the soft underbelly posing the most risk, but there's enough concern about slowing economic growth in the U.S. and Asia to provide a global perspective on the worries. With Sourcefire's own earnings due out at the end of the month, analysts are concerned it will repeat the process, though they haven't yet revised their own expectations for the fourth quarter or the full year.

No one wants drunk texting
This may be an overreaction, however. While it's suggested businesses are cutting back their IT spending, the need for the network security solutions offered by Sourcefire, Fortinet, and Check Point has never been greater. The proliferation of mobile devices from smartphones to tablet computers has heightened the need to protect enterprise systems from the widening "bring your own device" phenomenon that permits employees to access corporate networks on the personal devices.

Aruba Networks (NASDAQ: ARUN) has especially benefited from the trend, and analysts were surprised by the strength of its earnings for its fiscal fourth quarter, such that at least one analyst believes the market for dealing with it is at an inflection point. Symantec (GEN 1.03%), the industry leader in security solutions generating $4.6 billion in annual revenue for enterprise services, would agree. As the workforce becomes more mobile, they say businesses will need to embrace their employees' needs while maintaining the integrity of their network.

A source of hope
Despite global financial turmoil, Sourcefire still grew commercial revenues by 31% in the second quarter and international revenues were up 55%, so that they're now half of the commercial sector. Of course, if the situation on the continent unravels further, it will have a greater impact on its results. The security specialist also carries a much higher forward valuation than any of its rivals: at 46 times estimates, it's twice what Aruba is going for and four times Check Point's valuation. An earnings surprise, though, could validate that multiple, but investors should realize it is priced to perfection.

Earlier this year I rated Sourcefire to outperform the market indexes on Motley Fool CAPS, the 180,000-member investor community where informed opinion is transformed into stock ratings of one to five stars. The relatively low two-star rating Sourcefire carries suggests perhaps members aren't yet convinced the market needs yet another network security specialist, and my own score has been disappointing: Sourcefire's stock has fallen 15% since I weighed in, compared to a 12% gain by the S&P 500.

While I'm still convinced Sourcefire will light a fire under its stock, let me know in the comments box below if you think it won't be able to outmaneuver the industry's weakness.