TAKING STOCK: Sourcefire

Dear Mr. Berko: A friend of mine bought 1,500 shares of Sourcefire at $58 because he was told IBM will buy out the company. Can you verify this information? If the rumor isn't true, I will still buy 150 shares if you think it is a good, long-term technology investment for my IRA. The only tech issues I own are IBM, Micron Technology and Microsoft, and I'd like to own a more aggressive tech stock. Please advise me if you think this is a good growth issue. AL: Moline, Ill. Dear AL: First, sell your Microsoft. Its new Windows 8 is an abomination. I spoke to an acquaintance at Morgan Stanley that took Sourcefire public in March of 2007. He is not privy to any buy out rumor. I also spoke to sources at Merrill Lynch, Citigroup and Oppenheimer, members in good standing with the New York Financial Mafia who also cover Sourcefire. Nothing! Meanwhile Sourcefire (FIRE-$49) makes intrusion detection software that tells computer network operators if their system is being invaded by hackers or others with evil intentions. FIRE's technology continually analyzes a client's network traffic for irregularities, unusual incoming and outgoing traffic patterns, strange blips, spikes or non-conformist usage. FIRE uses an RNA (Real-time Network Awareness) platform, developed by its founder Martin Roesch, called Snort because it sniffs out potential security breaches. There was talk of an IBM buyout in 2007, there's nothing in the oven today and I can usually sniff out such rumors fairly well with a half-dozen phone calls. Your friend is gambling with $90,000, and I hope he can handle the risk because I think he goofed. He goofed big time - I don't believe any stock is worth 60 times earnings. FIRE ran up to $58 in May 2012, but I suspect that price spike was a result of a few hedge funds like Wynken, Blynken or Nod who may have been hot on FIRE. And if FIRE's earnings rise to $1.00 on projected revenues of $228 million in 2013, I doubt it can maintain a 60 P/E ratio or that it will trade at $60 a share. Rather, the P/E ratio is more likely to drop around the 45-level so FIRE is more likely to trade in the $45 to $50 range. FIRE has around 541 employees, some 386 of whom are probably scrunched- hunched in cubicles, drinking coffee, gulping down Monster beverages and snacking on Snickers and gluten-free grain chips while writing code. However, considering the company's erratic earnings history and volatile net profit margins, I'm convinced that this outfit is poorly managed. FIRE's dinky net profit margins of 3.7 percent and weak operating margins of 6.2 percent are well below its peers. And its meager 2.7 percent return on assets is terribly disappointing. Sourcefire has zero debt and I can't help but wonder how much worse those numbers would be if management had to concern itself with managing semi-annual bond interest payments. FIRE's intelligent cyber security technology is good. Frankly it's pretty darn good. But there's lots more to running a company than producing a great product. And that "lots more" is managing other necessary tasks such as marketing, product costs, sales, expenses, human resources, banking, R&D, accounting, facilities management, customer relations, etc. Cisco Systems (CSC-$19) is FIRE's largest competitor. CSCO has $46 billion in revenue, $16 billion in debt, operating margins of 24 percent, net profit margins of 17 percent, return on assets of 8 percent, pays a dividend yielding 3.1 percent and trades at only 12 times earnings ... not 60. FIRE's other competitors, like AVG Technologies, OPNET and Allot, also have far superior numbers. FIRE's wool gathering management needs an industrial strength enema and it board of directors must hire professional management, not geeks, nerds and wonks, to run the company. I think the current $49 price is too high. If you still want to add FIRE to your cast of tech stocks, consider a Good-'Til-Canceled, open order to buy FIRE at $34. ---------- Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. Visit Creators Syndicate website at www.creators.com. © 2012 Creators Syndicate Inc. Published: Wed, Dec 5, 2012