Using Ratios To Identify Stocks Set To Outperform Their Peers: Cyber Security Rankings Update

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Includes: FEYE, FTNT, JNPR, PANW, SYMC
by: Stock Scrutiny

Summary

I give updated rankings for the five stocks used in my cyber security analysis.

I'll compare this year and last year's scores to identify any meaningful trends.

Year to date performance is presented along with how this performance relates to each company's final score.

Introduction

This piece marks the fourth analysis in the series where I introduce my research project which aims to find correlation between a company's financial standing among competitors utilizing ratios and the company's long-term stock performance. Included in the cyber security analysis are Fortinet (FTNT), FireEye (FEYE), Palo Alto Networks (PANW), Juniper (JNPR), and Symantec (SYMC). For those of you who are first time readers and looking for a more in-depth explanation, you can see my introductory article which goes into more detail on my entire process. Do note that each company's score is calculated using the financials posted after their most recent fiscal year end.

Ratio Research

Debt

FTNT

FEYE

PANW

JNPR

SYMC

Current Ratio

1.69 (3)

1.71 (2)

1.14 (4)

2.14 (1)

1.11 (5)

Quick Ratio

1.61 (3)

1.7 (2)

1.14 (4)

2.09 (1)

1.11 (5)

Current Liquidity Ratio

-137 (2)

-483 (4)

-73 (1)

-375 (3)

381 (5)

Defense Interval

1,167 (2)

1,202 (1)

837 (3)

569 (5)

764 (4)

Interest Coverage Ratio

0 (No Debt) (1)

0 (Loss) (4)

0 (Loss) (4)

7.77 (2)

1.82 (3)

Debt/Equity Ratio

0 (1)

1.27 (5)

.75 (3)

.49 (2)

.99 (4)

Current Debt Scores

1. Fortinet - (3 + 3 + 2 + 2 + 1 + 1) / 6 = 2

2. Juniper - (1 + 1 + 3 + 5 + 2 + 2) / 6 = 2.33

3. FireEye - (2 + 2 + 4 + 1 + 4 + 5) / 6 = 3

4. Palo Alto Networks - (4 + 4 + 1 + 3 + 4 + 3) / 6 = 3.17

5. Symantec - (5 + 5 + 5 + 4 + 3 + 4) / 6 = 4.33

Fortinet and Juniper hold a comfortable lead over the rest of the group in regards to their debt situation, and FireEye falls right in the middle with a score of 3. Just after that lies Palo Alto Networks at 4th place, sporting a score of 3.17, which is just slightly below average. In last by a considerable amount is Symantec, which places over an entire point behind the 4th place finisher. For comparison, here are last year's scores which help display some interesting trends:

Fortinet 2017 Debt Score - 2.17

Juniper 2017 Debt Score - 2.33

FireEye 2017 Debt Score - 2.83

Palo Alto Networks 2017 Debt Score - 3.17

Symantec 2017 Debt Score - 4

Overall, there wasn't a whole lot of change in debt scores year over year. Fortinet managed to stay in 1st place while incrementally improving its score from 2.17 to 2. Juniper's rank was stagnant, holding strong at 2.33 and still securing 2nd place. FireEye marginally lost some ground on its competitors, with its score inching up in the wrong direction from 2.83 to 3. Next down the list is Palo Alto Networks, which was in the same camp as Juniper due to the fact its score didn't change at all, and it remained in the same position as it was the year before. Lastly, and the company which saw the greatest move in its score, is Symantec. Their score dropped from a 4 to a 4.33, solidifying the fact that their debt situation compared to the other four companies is lagging.

Profitability

FTNT

FEYE

PANW

JNPR

SYMC

Gross Margin

74.77% (2)

64.94% (4)

71.8% (3)

60.22% (5)

78.7% (1)

Operating Margin

8.81% (3)

-31.89% (5)

-7.77% (4)

15.29% (1)

14.49% (2)

Net Margin

8.07% (1)

-37.68% (5)

-8.65% (4)

5.28% (2)

-6.93% (3)

ROA

5.37% (1)

-12.39% (5)

-5.14% (4)

2.76% (2)

-2% (3)

Effective Tax Rate

17.83% (3)

-1.55% (2)

-8.63% (1)

63.77% (4)

176.19% (5)

Profit Per Employee

$21,713 (3)

-$80,937 (5)

-$39,456 (4)

$90,212 (1)

$56,083 (2)

Current Profitability Scores

1. Fortinet - (2 + 3 + 1 + 1 + 3 + 3) / 6 = 2.17

2. Juniper - (5 + 1 + 2 + 2 + 4 + 1) / 6 = 2.5

3. Symantec - (1 + 2 + 3 + 3 + 5 + 2) / 6 = 2.67

4. Palo Alto Networks - (3 + 4 + 4 + 4 + 1 + 4) / 6 = 3.83

5. FireEye - (4 + 5 + 5 + 5 + 2 + 5) / 6 = 4.33

Fortinet finds itself in 1st place again, with another low score of 2.17. In 2nd place is Juniper, which received another solid, above-average score. Just .17 points behind it is Symantec, which scored 2.67 and completely reversed course from the terrible 4.33 the stock scored in the debt category. On to 4th place is Palo Alto Networks, which scored over a full point lower than the 3rd place finisher as some of its margins were still too far negative. In last was FireEye, which also saw a complete flip in its trajectory after scoring above average in the debt section. Here are last year's scores to use as a comparison:

Fortinet 2017 Profitability Score- 1.83

Juniper 2017 Profitability Scores- 1.83

Symantec 2017 Profitability Score- 2.67

Palo Alto Networks 2017 Profitability Score- 3.67

FireEye 2017 Profitability Score- 4.5

Although Fortinet remained in 1st place, it still dropped its score a bit and moved from 1.83 to 2.17. Juniper lost its tie with Fortinet for 1st place and fell into 2nd and also saw the largest drop in the entire group - going from a score of 1.83 to 2.5. In 3rd place and keeping its score among the competition unchanged was Symantec. Palo Alto Networks stayed in 4th place and lost .17 points - margins were improved but not enough to pass the companies that were ahead of it. Rounding out the list in both years was FireEye, whose current score of 4.33 is horrendous, yet some progress was made since last year's score was even worse at 4.5.

Efficiency

FTNT

FEYE

PANW

JNPR

SYMC

Revenue Per Employee

$295,104 (4)

$234,687 (5)

$388,924 (2)

$534,787 (1)

$387,122 (3)

Employee Cost Per Unit of Revenue

.465 (3)

.557 (5)

.467 (4)

.234 (1)

.448 (2)

Capital Expenditure Ratio

11.07 (4)

17.15 (3)

10.81 (5)

33.29 (2)

34.13 (1)

ROE

15.75% (1)

-41% (5)

-23.94% (4)

5.53% (2)

-7.87% (3)

ROIC

9.01% (1)

-16.32% (5)

-8.84% (4)

3.37% (2)

-2.57% (3)

Asset Turnover

.67 (1)

.33 (4)

.59 (2)

.52 (3)

.29 (5)

Current Efficiency Scores

1. Juniper - (1 + 1 + 2 + 2 + 2 + 3) / 6 = 1.83

2. Fortinet - (4 + 3 + 4 + 1 + 1 + 1) / 6 = 2.33

3. Symantec - (3 + 2 + 1 + 3 + 3 + 5) / 6 = 2.83

4. Palo Alto Networks - (2 + 4 + 5 + 4 + 4 + 2) / 6 = 3.5

5. FireEye - (5 + 5 + 3 + 5 + 5 + 4) / 6 = 4.5

Juniper had another solid showing with an extremely good score of 1.83, handily securing 1st place. In 2nd and 3rd were Fortinet and Symantec, respectively, with each of the companies scoring above average. Palo Alto and FireEye each had their problems with efficiency, with the former coming in 4th and the latter finishing dead last with a dismal score of 4.5. To get a better understanding, we can utilize the prior year's scores:

Juniper 2017 Efficiency Score - 1.5

Fortinet 2017 Efficiency Score - 2.5

Symantec 2017 Efficiency Score - 2.67

Palo Alto Networks 2017 Efficiency Score - 3.83

FireEye 2017 Efficiency Score - 4.5

Just like in the profitability category, Juniper remained in 1st place yet lost some of the advantage it held over the rest of the group. Fortinet continued its trend of low scores and even improved its efficiency score slightly. Symantec held steady at 3rd place but dropped its score by a fraction, also marking the last of the 3 companies that scored above average in this category. Moving on to 4th place, Palo Alto's score left something to be desired, but it was promising to see it improve a decent amount. That leaves FireEye to earn another last place finish as its score of 4.5 remained the same.

Growth

FTNT

FEYE

PANW

JNPR

SYMC

EPS Growth

657% (1)

51% (3)

-39% (5)

4.9% (5)

142% (2)

Revenue Growth

49.5% (2)

20.5% (4)

89.9% (1)

3.5% (5)

25% (3)

Debt Growth

0% (1)

10.5% (4)

7.8% (2)

10.3% (3)

122% (5)

Working Capital Growth

96.4% (3)

-96% (5)

141% (2)

770% (1)

22.5% (4)

Free Cash Flow Growth

86.6% (2)

-49% (5)

121% (1)

44.9% (4)

54.2% (3)

Current Growth Scores

1. Fortinet - (1 + 2 + 1 + 3 + 2) / 5 = 1.8

2. Palo Alto Networks - (5 + 1 + 2 + 2 + 1) / 5 = 2.2

3. Symantec - (2 + 3 + 5 + 4 + 3) / 5 = 3.4

4. Juniper - (5 + 5 + 3 + 1 + 4) / 5 = 3.6

5. FireEye - (3 + 4 + 4 + 5 + 5) / 5 = 4.2

Like all the other categories, Fortinet performed well, scoring well below a 2 and signaling that it has seen strong growth relative to the other four cyber security stocks. Right behind at 2nd place is Palo Alto Networks, which also sports an impressive growth score derived from strong past performance. Transitioning into the companies which scored above a 3 - which means below average performance - is Symantec in 3rd, Juniper in 4th, and FireEye making another appearance at 5th place. Here are last year's scores:

Fortinet 2017 Growth Score - 2.4

Palo Alto Networks 2017 Growth Score - 1.8

Symantec 2017 Growth Score - 4.8

Juniper 2017 Growth Score - 2.8

FireEye 2017 Growth Score - 3.2

The growth category saw a lot of movement among the company's scores and ranks. Fortinet jumped from 2nd place to 1st place when it improved by more than half a point. The opposite took place for Palo Alto Networks, which lost its hold on 1st place and fell to 2nd because it nearly lost a half point. Symantec placed last in almost every single growth metric last year, but found some footing and gained more than one point on its peers, launching it into 3rd place. Last year, Juniper held a respectable, superior score of 2.8, but after a year passed, it dropped all the way down to 3.4 and caused the stock to drop from 3rd to 4th place. In a move that sums how FireEye's entire performance played out, the business fell from 4th to 5th place due to a decrease of a whole point, marking an end to the lagging display.

Final Scores

After implementing performance based weighting to each category, I have determined that the Debt ratios are most correlated to price performance, followed by Growth, Profitability, and then Efficiency. Therefore, instead of the equation for finding the cumulative score of a stock looking like this:

(Debt Score x .25) + (Profitability Score x .25) + (Efficiency Score x .25) + (Growth Score x .25) = Final Score

It now looks like this:

(Debt Score x .32) + (Profitability Score x .21) + (Efficiency Score x .18) + (Growth Score x .29) = Final Score

With this weighting, more value is given to categories with the greatest correlation to price performance, which in turn should lead to more accurate final scores. To answer any lingering questions about how I determine weighting, please see my article that introduces the concept. Here are the most recent weight-adjusted scores for the cyber security industry:

1. Fortinet - 2.04

2. Juniper - 2.64

3. Palo Alto Networks - 3.08

4. Symantec - 3.44

5. FireEye - 3.90

Fortinet did not have one below average score in any of the four categories, which helped propel the stock to take 1st place with ease. In 2nd place was Juniper, whose only weakness seemed to be its growth story, but remained very strong in the remaining categories. Coming in 3rd place was Palo Alto Networks, who was driven by its powerful growth score and the fact that the weighting put a lot of emphasis on the growth category, therefore causing the final score to benefit handsomely. Symantec secured 4th place and was dragged down by its atrocious debt score, which had the most weighting of all the four categories. Rounding out the top 5 was FireEye, which had trouble finding any advantage besides debt, which saved them from an even worse score due to how the weighting of each category played out. To see the most important trends, here are last year's weight-adjusted scores:

Fortinet 2017 Final Score - 2.22

Juniper 2017 Final Score - 2.21

Palo Alto Networks 2017 Final Score - 3.00

Symantec 2017 Final Score - 3.71

FireEye 2017 Final Score - 3.59

In each of my analyses, there seems to be at least one company that stands above the rest- scoring well in each of the two years I have data for. In regards to the five companies used in my cyber security analysis, Fortinet has the potential to be that quality company. After a drop from Juniper, Fortinet's improvement in its already stellar score moved it up into 1st place from 2nd. To stay in the above average score range is one thing, but to improve an already competitive score displays another level of development that should be admired by investors. As the company matures, I expect the score to continue to improve relative to these other five companies and the stock price to carry on with the appreciation it has experienced in the last couple years - leading it to be identified as one of the long-term outperformers I set out to find when initially starting my research.

Although Juniper had two exceptional scores, the decrease it saw year to year is a little concerning to me. This is a long term research project, so I'm not saying that the company is in a downward spiral and destined for poor performance. My point is that if I was going to label this as a promising company (based off my ratio analysis), I would want to see if it improved its score next year. That way, I would make sure I would not take on the risk of its score continuing to drop, signaling the company is losing too much ground to its competition.

Palo Alto Networks looks like a promising company to me, but it still lacks the profitability and efficiency ratios that the more mature companies on the list have. In the future, instead of dropping marginally like it did from last year to this year's rankings, I expect these kinds of ratios to catch up to the rapid growth the stock has seen as of late, thus forcing the final score to improve immensely. My guess is that Palo Alto's score will soon overtake Juniper's and see long-term outperformance over that of Juniper.

Symantec scored poorly in each year, but it's worth noting that the cumulative score did improve quite nicely. It's still too early to tell, but part of my hypothesis states that if a stock can consistently improve its final score (which is practically its average place among the five companies), it is setting itself up for outperformance in the long run. With only two years of data, it's impossible to say whether the score will continue to advance, which is why it will be best to wait for more years of data. If the score never breaks the 3 threshold, I doubt the stock will manage to outperform its peers in the long run.

FireEye's score was disappointing to me due to the fact its price has appreciated pretty well over the last two years while lagging far behind in terms of its score. If my system has any value to it, I expect one of two things to happen. First, the company's consistently sub-optimal scores will catch up to the stock price and begin to weigh it down as investors realize that the business's financials are just not up to par with some of its competitors. The second possibility is that scores begin to improve and more properly align with the stock's positive price performance compared to its peers. The good-sized decline in its score since last year isn't a good start, but once more data is gathered a trend should begin to form.

Year to Date Performance

Rank Score YTD Performace
Fortinet 1 2.04 55.6%
Juniper 2 2.64 -.06%
Palo Alto 3 3.08 52.8%
Symantec 4 3.44 -15.9%
FireEye 5 3.90 14.17%

Do remember that the scores I calculated aren't meant to find short-term correlation and that I show year to date performance just for reference. Once I complete more articles and compile more years of data (by backtesting), performance of stocks will be more relevant, and I'll be able to publish articles, including all of this data. Near the end of the year, I will publish a Year in Review article, and even though short term performance isn't a primary goal of my project, it will be interesting to see if there is any correlations or trends present.

Disclosure: I am/we are long FTNT.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.