It's been a rough couple of years for investors in No. 2 (after rival Symantec
But today, a light twinkles at the end of McAfee's tunnel. The last of the restatements appears to be behind us, the company's earnings releases are getting more intelligible, and in a move that in one step both simplifies its statements and streamlines its business, McAfee is focusing in on what it does best: making the Internet secure for you and me.
In the third quarter just ended, McAfee sold off its non-core "Sniffer" network management unit (having already previously divested its "Magic" help desk division) for a tidy profit. That sale boosted net profits for the quarter to $118 million, or $0.70 per diluted share.
McAfee failed to provide a cash flow statement as part of its earnings release, and its 10-Q has not yet been filed with the SEC. That makes calculating its free cash flow (FCF) an exercise in guesswork -- but we can at least make this an educated exercise. According to the most recent 10-Q filed, for the first half of 2004, McAfee generated $178 million in free cash flow (a huge increase over the $48.8 million generated in the first half of 2003). Double that number to hypothesize the company's possible run-rate of free cash flow generation through the end of 2004, and we could be looking at $356 million in FCF for the year. McAfee has an enterprise value (EV) of: $4.1 billion (its market cap) plus $200 million (long-term debt) minus $870 million (cash), which equals $3.43 billion. Divide the enterprise value by the free cash flow and McAfee has a forward EV/FCF of 9.6. That's cheap when compared to the company's 14% return on equity and 15% projected growth rate.
It's also nice to see that McAfee is finally reining in its stock dilution -- er, stock options program. The company repurchased four million shares of stock at an average price of $19.25 a stub. The basic share count remained almost unchanged, suggesting that the repurchases did little more than mask options dilution. Yet it does seem that absent those masking effects, shares outstanding would still only have risen just 2.5%. While any dilution is unfriendly to outside shareholders, 2.5% is closer to the "reasonable" side of the "reasonable-obscene" scale. So all in all, investors should be pretty happy with McAfee today.
Read all about McAfee (nee Network Associates) and its archrival, Symantec, in:
- McAfee Finds Security in Foundstone
- Software Strengthening Like a Virus
- Symantec's Simply Terrific
- Network Associates Restates Truth
Fool contributor Rich Smith has no interest in any of the companies mentioned in this article.