RSA Security Dn 4%: Wedbush Cuts On Valuation, Probe Risk

R. A. Hettinga rah at
Mon Apr 14 12:38:30 EDT 2003


Wall Street Journal

April 14, 2003 12:21 p.m. EDT 

RSA Security Dn 4%:
Wedbush Cuts On Valuation, Probe Risk 

By Michelle


NEW YORK -- Shares of RSA Security Inc.
(RSAS) gave back some of Friday's gains, falling 6% after an analyst
downgraded the stock to sell from hold Monday. 

The stock reached a
52-week high Friday of $9.10 after the Bedford, Mass., company issued
first-quarter results late Thursday that beat estimates. The company also
issued second-quarter earnings and revenue outlooks that were slightly
higher than expected. 

Wedbush Morgan Securities Inc. analyst Timothy
Leehealy thought the rally was unwarranted and said the stock is fairly
valued at $7.50. 

"After what we believe was an excessive reaction to
Thursday's earnings, we believe the stock has achieved a valuation that is
excessive by almost any measure," Leehealy wrote. 

The analyst doesn't own
RSA shares. His firm makes a market in the stock. 

"The relative stability
of RSA's business compared to the weak fundamentals of many of its
competitors can be used to explain some of the difference, but we believe
that rationale falls far short of explaining the entire (premium at which
it trades to its peers), especially when one considers that RSA is
currently being investigated by the SEC," Leehealy added. 

The developer
of software used to manage remote access to computers posted first-quarter
net income of 3 cents a share, 2 cents better than the Wall Street target.
For the current quarter, RSA expects results between break-even and a
profit of 4 cents a share. Analysts expect earnings 3 cents a share. RSA
expects revenue to be between $58 million and $63 million. Analysts expect
$61.4 million. 

Leehealy characterized RSA's first-quarter results as
"only marginally better than consensus estimates," and said the company's
second-quarter projection "wasn't surprising either," noting that analysts
have made only minor upward adjustments to their estimates as a result.

The long-standing Securities and Exchange Commission probe into RSA's
accounting disclosures and stock-trading is also a source of continued
concern for the analyst. 

The SEC notified RSA on Jan. 23 that it was
investigating the way the company disclosed an accounting change, which
altered the way RSA estimates distributor revenue. The SEC is also
investigating trading in the company's stock. 

The disclosure issue
centers on whether RSA should have revealed the accounting change in a
press release rather than wait several weeks and include it only in a
regulatory filing. The stock-trading matter hasn't been explained. 

of RSA were recently down 46 cents to $8.64 on volume of 1.4 million
shares. Average daily volume is 666,000. 

Robert W. Baird & Co. analyst
Steven Ashley views the investigation as a non-issue for RSA Security.

"It is not a probe that deals with accounting with reported numbers, with
anything related to RSA - the corporation - it is a probe into the actions
of some members of management, how they conducted themselves with respect
to disclosing information that's ancillary to the fundamentals of this
business model," Ashley said. 

The SEC's investigation may already be
closed, he added. But even if it isn't, "it's completely irrelevant to the
future prospects of RSA." 

"The SEC requests information, and they never
come back to tell you whether they've concluded the investigation or not -
two years from now this will be an outstanding issue. As far as I'm
concerned it's concluded," he said. 

Ashley, who has a neutral rating and
a $9 price target on RSA Security's stock, doesn't own shares of the
company. While his firm makes a market in the stock, it doesn't have an
investment banking relationship with RSA Security. 

According to Wedbush
Morgan analyst Leehealey, however, RSA Security said in its conference call
Thursday that the investigation is still ongoing. The possible outcome is
still "an unknown," and the company's reticence in relation to the probe
raises questions, he said. While the probe isn't a major concern, Leehealey
added, "I demand more (financial) returns from a company that's involved in
an SEC investigation," since only stronger returns justify taking that
risk, he said. 

Ashley, on the other hand, views the rally in RSA's stock
Friday as a turning point in investor opinion about the stock. 

"It became
apparent that the story is clean and that business is improving," he said.

He attributes Monday's losses to both a normal pullback following a
strong upsurge in the stock price and to Wedbush Morgan's lowered
investment opinion. 

Ashley is pleased with the company's results and
outlook, noting that RSA's business "has firmed up." 

Moreover, the
company has seen stabilization in some divisions that had seen revenue
declines, and its core business "continues to rise kind of a
tough environment." 

RSA is also one of the first technology companies to
standardize financial reporting earnings using generally accepted
accounting principles, he added, a move that reveals the company's
financial strength. 

R. A. Hettinga <mailto: rah at>
The Internet Bearer Underwriting Corporation <>
44 Farquhar Street, Boston, MA 02131 USA
"... however it may deserve respect for its usefulness and antiquity,
[predicting the end of the world] has not been found agreeable to
experience." -- Edward Gibbon, 'Decline and Fall of the Roman Empire'

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