US SEVERAL TECH SECURITY FIRMS ATTRACTING INVESTOR INTERESTTech security firms thrive as ID threat grows - Jul. 7, 2005Safety dance

With identity theft fears at full boil, several tech security firms stand to benefit.
July 7, 2005: 2:46 PM EDT
By Paul R. La Monica, CNN/Money senior writer

Is it safe?
These rapidly growing tech security companies are fighting ID theft. Are their stocks worth buying?

Company P/E* LT Est. EPS Gr. Rate
Aladdin Knowledge Systems 18.4 24%
Entrust 33.1 25%
RSA Security 18.3 15%
SafeNet 19.0 20%
Secure Computing 18.8 18%
Tumbleweed Communications 16.3 25%
Vasco Data Security 38.1 38%


* based on prices as of 7/6/05 and 2006 EPS estimates.
Source: Thomson/Baseline

NEW YORK (CNN/Money) - There are lots of nasty people out there who would love nothing more than to steal your Social Security number or credit card info and go on a lavish shopping spree.

Scared? Well, here's the good news. There are also several technology companies that have solutions to fight identity theft. And in addition to helping protect you, they may also wind up being profitable investments.

The rash of high-profile security breaches at several banks and retailers this year have raised awareness of how big a problem identity theft is.

"There is no real solution to stop identity theft immediately but the big tech trend is to focus on requiring stronger forms of authentication. And that's where security companies come into play," said Michael Tieu, an analyst with Southwest Securities.

Token advice
To combat the growing problem, Tieu and other analysts said that corporations could start spending more on software and hardware from companies a slew of companies, including SafeNet, Entrust, Aladdin Knowledge Systems, Vasco Data Security, RSA Security, Secure Computing and Tumbleweed Communications.

"It's not going to happen overnight but there could be enough business to move the needle a bit for some of these companies," said Sean Jackson, an analyst with Avondale Partners.

Jackson said that he likes SafeNet (Research), which makes authentication tokens, devices that make it much tougher for someone without access to critical information on a corporate network to break into the system and steal data. These tokens often need to be plugged into a computer's USB port.

The company, which is primarily known as a vendor of encryption software to government agencies, should generate between 20 percent and 25 percent of its sales from its token business this year, according to several analysts.

Jackson also likes Entrust (Research), which makes the IdentityGuard, a bingo-like card that features random arrays of numbers and letters that a user must enter to gain access to a network in addition to their user name and password.

Alan Weinfeld, an analyst with Kaufman Brothers, also said SafeNet and Entrust are top picks among security companies with a presence fighting identity theft. But he also thinks Tumbleweed Communications (Research) stands to gain a lot as well and he thinks it's a bit more of a sleeper pick.

Tumbleweed's major area of focus has been selling software to corporations that helps fight spam. But Weinfeld said that a newer business for the firm, software that helps to securely transfer data files, could be an extremely lucrative area for Tumbleweed.

Weinfeld explains that several of the more notable data security breaches involved the theft of computer tapes which stored credit card information. Tumbleweed's data transfer product, however, gives companies a way of transmitting this information electronically, which eliminates the risk of hard copies being stolen.

"With secure file transfers, you'd never have to have all these tapes in the first place because the information gets encrypted," he said. "Revenues from this business were up for Tumbleweed in the first quarter from a year ago and that was before any major front page stories and attention about ID theft. So sales should accelerate."

Play it safe
Gregg Moskowitz, an analyst with Susquehanna Financial Group, said that RSA (Research), Aladdin (Research) and Secure Computing (Research) could also see a boost to sales because they also make tokens.

He adds that anti-virus firms Symantec (Research) and McAfee (Research) are another way to play the ID theft trend since these companies sell programs that consumers can use to help protect themselves from spyware, which some hackers use to try and log keystroke information on computers in order to steal password information.

But Moskowitz said investors shouldn't expect most of these companies to generate a huge increase in sales since for many security companies, fighting ID theft is just one part of their overall business.

"ID theft is not necessarily going to be a home run for these companies but there are significant opportunities nevertheless," he said.

And that leads us to Vasco (Research), which is the closest to being a pure play anti-ID theft company since nearly all of its sales come from authentication tokens and related software. But that might already be factored in to the company's stock. Shares of Vasco have surged more than 50 percent so far this year and trade at the lofty valuation of nearly 40 times 2006 earnings estimates.

So investors that want to play it, pardon the pun, safe, might be better of sticking with some of the other security companies. The rest of them trade in a range of about 16 to 33 times 2006 estimates and have estimated long-term earnings growth rates of about 15 percent to 25 percent.
"The macro trend is favorable for all these players," Tieu said.