Does anyone look at the cash flow statement anymore? If so, how is it that Secure Computing (NASDAQ:SCUR), which reported yet another quarter of improving free cash flow, was down as much as 15% in early trading today, before recovering to a 6% decline?

Perhaps the expectations game is to blame. Secure was projected to book more than $66 million in non-GAAP revenue, but collected $65.2 million instead. Earnings, though, were excellent. Secure booked $0.09 per share, easily besting the Street's $0.07 estimate.

Show me the money
But, again, this Motley Fool Rule Breakers pick really shines in cash flow. Secure has generated $28.5 million in free cash flow through the first nine months of 2007, up 61% over this time last year.

Surely some of that has to do with Secure's successful acquisition of CipherTrust last summer. Non-GAAP revenue was up 49%, after all. (Here's why you should pay close attention to Secure's non-GAAP numbers.) But it would be a mistake to assume that Secure is simply buying its way to higher cash flows. To the contrary; management has become increasingly efficient at squeezing cash from the business:

Metrics

TTM*

2006

2005

2004

Non-GAAP revenue

$252.6

$193.2

$109.2

$93.4

Free cash flow

$35.2

$24.3

$25.0

$12.2

FCF margin

13.9%

12.6%

22.9%

13.1%

Source: Secure Computing earnings reports.
*Trailing 12 months; numbers in millions.

Efficiency is always important to us investors. But it's even more important for firms facing tough competitors. Secure Computing has plenty, including Cisco (NASDAQ:CSCO), Blue Coat (NASDAQ:BCSI), and Websense (NASDAQ:WBSN).

And yet, on yesterday's earnings conference call, Chief Financial Officer Tim Steinkopf told analysts that he aims for Secure to realize 18% to 20% operating margins within 18 months. Historically, operating income and free cash flow have tracked pretty closely.

Uh-oh, here comes the mathanese
Think about that for a second. If Steinkopf is correct, Secure will see massive free cash flow growth over the next 18 months.

Do the math with me. According to Capital IQ, Secure is expected to book $300.6 million in 2008 revenue. Assuming Secure's margin transformation is only partially complete at that point -- say, to 15% -- the company would produce $45.1 million in free cash flow, or $0.56 a share if you assume 5% dilution.

That, in turn, means that Secure today trades for less than 18 times next year's free cash flow.

How is that fair? FCF has improved by more than 47% annually since 2004. Anything less than 25 times FCF -- or at least $12 a share using trailing free cash flow as a base -- is an unreasonably cheap price for Secure Computing.

A misunderstood multibagger in the making
But Secure is more than cheap -- it's also a leader.

Its Sidewinder firewall has never been breached. Its Web gateway product, WebWasher, routinely earns high praise from customers and the technical press. Its TrustedSource technology monitors billions of bytes of data from around the globe to preemptively detect and defeat threats. And digital threats have never been more serious, or more complex, than they are now.

In short: Secure Computing is in the right market, at the right time, with some very good technology. And yet the stock remains cheap -- a misunderstood multibagger in the making with years of growth still ahead.

Call it a gift from that wacko, Mr. Market. Better take him up on the offer before he comes to his senses.

Fool contributor Tim Beyers owned shares of Secure Computing at the time of publication. Secure is one of many winners in the Motley Fool Rule Breakers portfolio. Join the quest o find the next great multibagger with a 30-day free pass to the Rule Breakers service. The Motley Fool has a market-beating disclosure policy.