Windows 7 launch potential boon to McAfee, Symantec

Windows 7 launch potential boon to McAfee, Symantec
Posted: July 16, 2009, 2:22 PM by David Pett
Technology, Microsoft, Windows 7, McAfee, Symantec

With Microsoft Corp.s new Windows 7 operating system is set to hit store shelves in October, PC-related stocks are ready to bounce. Perhaps no one stands to gain more than computer security software companies, McAfee Inc. and Symantec Corp., says Deutsche Bank analyst Todd Baker.

"Operating system launches historically have had a positive impact on the entire PC value chain.

"Both McAfee and Symantec have historically outperformed the S&P around new OS launches by 40% and 26% respectively. With P/E multiples below historical averages and multiple expansion around prior OS launches, we expect the stocks to outperform near term."

Looking back at previous OS launches, Mr. Baker determined that shares in MacAfee outperformed the S&P 500 by 40% in the four months prior to launch, and outperformed the U.S. benchmark by 4% in the three months after launch. Symantec, meanwhile, outperformed by 26% four months prior to launch, but underperformed the S&P 500 by 3% in the three months post launch. Microsoft, for its part, tends to outperform pre-launch and underperform post-launch.

A current price/earnings ratio of 15.7x compared to the historical average of 20.4x and 23.2x witnessed 4 months prior to past OS launches, positions McAfee as one of the bigger beneficiaries of Windows 7, the analyst said, reiterating his BUY recommendation and $45 price target on the shares.

He is also encouraged by McAfees exposure to consumer revenue, which makes up 38% of its total sales, and its increased distribution reach – up 100% year-over-year – through partnerships with new operating equipment makers (OEMs).

"It could help during the hardware refresh cycle that accompanies the OS launch," he wrote.

Symantec, rated BUY with a $19 price target, is also expected to benefit from increased PC shipments that accompany the OS launch despite being less exposed on consumer security revenue.

"With valuation of 9.5x P/E, Symantec shares are significantly below the average of the historical trading range of 15.7x and 16x seen 4 months prior to past OS launches," Mr. Baker told clients.

"We expect multiples to expand to historical range as street becomes confident about improved execution and Windows 7 positively impacts end user demand."

David Pett


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