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McAfee Suyang “ sean ” hong , yanyan xu

McAfee Suyang “ sean ” hong , yanyan xu. Presented on 11/10/2009. Deliverable Outline. Company Overview Company Strategy Macro-economic Outlook Industry Analysis Competitors Valuation Client Portfolio Recommendation. Company Overview. History Current Position. History.

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McAfee Suyang “ sean ” hong , yanyan xu

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  1. McAfeeSuyang “sean” hong, yanyanxu Presented on 11/10/2009

  2. Deliverable Outline Company Overview Company Strategy Macro-economic Outlook Industry Analysis Competitors Valuation Client Portfolio Recommendation

  3. Company Overview History Current Position

  4. History • 1992- Incorporated, under the ticker “MCAF” • 1997- Merged with Network associates, under the ticker “NETA” • 1999- McAfee.com initial public offering, under the ticker “MFE” • 2002- Company streamlined to security focus • 2004- First stage of reformation was completed 2004 is the turning point when company showed strong profitability in focused area.

  5. Current Position • Largest company dedicated to security technology • Employee: 5,600 • Newly added to S&P 500 • 35 billion asset and 1.6 billion revenue in 2008 • Global expansion to Europe, Asia, Latin-America • McAfee is the leader in the market

  6. Acquisition Strategy • Roll-up company that grows by acquisition • Focus on single market- security • Most recent acquisitions: • MX Logic $140 million • Solidcore Systems $33 million • Endeavor Security $3 million • McAfee is currently enjoying the benefit from its acquisitions

  7. Company Strategy Business Model Products

  8. Business Model • The 3-5-3 model describes products, geography and customer

  9. Products • System Security Offerings • PC protection • Network Security Offerings • Internet protection • Vulnerability and Risk Management Offerings • Company security protection • Comprehensive product mix that dominate the market

  10. Geography • Focus on North America and Europe market and explore the emerging market

  11. Industry Analysis Industry Overview Five-forces Analysis

  12. Industry overview • Adverse effects: • Economic downturn alters consumption • Limit to credit-impairs acquisition strategy • Foreign exchange exposure • Favorable effects: • Threat of terrorism stimulates the market • Stable growth in Internet access • Government recognition and procurement • Impact on adverse side is systematic while that on favorable is industry specific

  13. Five-forces Analysis • Suppliers play more strongly with less threat from substitution and buyers

  14. Strength and Weakness

  15. Opportunities and Threats

  16. Financial Position Income Analysis Leverage Efficiency

  17. Income Analysis • High gross margin, high SG&A cost/ Stable performance through out recent years

  18. Efficiency • Increasing utilization of assets

  19. Competitors Analysis Competitors Profile Comparable Analysis

  20. Competitors Profile • International Business Machine • Integration of IT consulting • Microsoft • Internet-PC market giant • Symantec Corporation • Pure-player competitor • Other medium-small size company • Converted to strategic alliance (SIA) • Successfully mitigate the challenge from giants and small competitors

  21. Competitors Profile • International Business Machine • Computer technology and IT consulting company • Market Cap: 165.51B • Employees: 398,000 • Microsoft • Computer and internet technology company • Market Cap: 257.41 • Employees: 93,000 • Big companies that have related sector or department in security industry

  22. Competitors Profile • Symantec Corporation • Security software company • Market Cap: 14.38 B • Employees: 17,500 • Leading position overtaken this year by McAfee

  23. Security Innovation Alliance • Security Innovation Alliance • Technology partnering program to accelerate product development • Different level of Alliance • Strategic Alliance • Downstream of the value chain • Most recent alliance: Lenovo, Verizon and Adobe • McAfee uses alliance to antagonize giants in the market

  24. Profitability • Medium performance in profitability and potential in cutting SG&A expense

  25. Liquidity • Low debt obligation reduces future risk

  26. Efficiency • High efficiency and utilization of assets

  27. Valuation Historical Highlights Management Assumptions WACC DCF Multiples

  28. Historical Highlights Huge turnaround since 2004: divested non-core business, focused on acquisition, and restructured

  29. Management • Forecasts about what they plan to see in 2009 with respect to the income statement • Give forecasts in “absolutes” • Clear explanation of what impacted each line of last three years of line items • Core strategy • Strong history of acquisitions and strong forecasts of future acquisitions and partnership deals • Roll up, fragmented industry Management clearly defines historical impacts and identifies key drivers for the future

  30. Assumptions • Costs grow at a slower rate due to business model, every additional sale of software or service above fixed cost lacks substantial variable cost and goes straight to the bottom line • Revenue • Increase customer base • Strengthening relationships with strategic partners • Increased revenue from upgrade initiatives • Increased revenue from network security solutions, higher hardware content means more upfront revenue realization • Cost (Absolute) • Grow from McAfee Consulting Services • Increased demand from subscription based products • Impact of acquisitions (Amortization)

  31. Assumptions Strong revenue growth, slow reduction of growth in COGS, increasing growth in R&D and amortization

  32. WACC • Operating leverage is high, financial leverage is low

  33. WACC - Bloomberg • Lower WACC explained by significantly lower beta (weekly, 2 year)

  34. DCF • Current price is around $42 Goal Post Bloomberg

  35. Multiples • Intrinsic value is around $36 to $45

  36. Client Portfolio Diversification Projected position in portfolio

  37. Diversification • Low correlation with current holdings

  38. Projected Position • If 300 Shares purchased, it would represent around 3% of the total portfolio value

  39. Recommendation • Pros • DCF shows fairly valued • Current price of $42 • Intrinsic value of $36 to $45 • Management’s new business model has turned the company around since 2004 • Current projections for the future are strong • Largest dedicated security • Cons • 39 PE Multiple • Market has high expectations • Will they meet and beat expectations? • One bad year can mean huge reduction in sales price • Add to Watchlist. If price pulls back, look to purchase 300 shares

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