McAfee: An Opportunistic Short Following Earnings Report

Apr.27.07 | About: McAfee Inc. (MFE)

Out of several comments on McAfee (NYSE:MFE) two caught my eye:

- Morgan Stanley notes that some quick math to back into bookings implies bookings growth of approximately 5% y/y and a healthy draw from the balance sheet. And in addition to an option review process dragging on, they flag fewer metrics to measure the performance detail of the core business on a real-time basis as an issue.

- JP Morgan says they do not think the massive revenue upside is a sign of a big acceleration in the market rather than a mix issue causing different accounting treatment, that is supported by guidance only going up by 1Q07 beat.

Deferred revenue was flat qoq at $893.9M, worst qoq growth since Sept. 04. Firm believes the mix issue was the primary reason which is unfortunate because deferred revenue provides the visibility for future quarters. This is first time in over two years that visibility has not improved through higher deferred revenue.

Notablecalls:
The headline numbers for the quarter were definitely strong, with the company beating consensus on both top and bottom line. That beat however seems to be one-time of nature and possibly borrowed from the next quarters. With bookings growth of just 5% y/y and deferred revenues staying flat q/q, sure doesn't look like that kind of outperformance is about to continue.

The stock is trading ~19x this year's earnings, not particularly cheap, but not extraordinarily expensive either. However, with the questionable future cash flow trends and slow growth, I do not think this is the stock I would like to own. The stock has been stuck around $30 over the past six months and I do not think this report is strong enought to generate appetite for the stock above the recent range.

As such, I would be opportunistic short around recent highs at the $31.50 level. Note, however, that the recent market has provided some wild moves (AMZN anyone?) and have your stops tight.