Royce & Associates Likes Identification and Security Company Brady Corp

Some other security software and services companies which we can compare to Brady are Check Point Software Technologies Ltd. (NASDAQ:CHKP), Sourcefire, Inc. (NASDAQ:FIRE), Mantech International Corp (NASDAQ:MANT), and Symantec Corporation (NASDAQ:SYMC). Sourcefire is the outlier of this group in that it has the most growth priced into the stock: the forward P/E, for example, is 46. While sales were up strongly in the third quarter of 2012 versus a year earlier, net income was down 39%. 17% of the outstanding shares are held short, so a number of market players think it is overvalued. We think it’s best to avoid the stock.

The forward earnings multiples of the other three peers cluster between 11 and 13, so they seem to be trading at a discount compared to Brady. Mantech is another struggling company: its most recent quarterly report showed lower revenue and earnings than in the same period in 2011, and that forward earnings multiple reflects an expectation that net income will be even lower in 2013. It is another popular short. The larger Checkpoint and Symantec are more stable from a business standpoint, and combined with their cheap multiples they might be worth taking a closer look; even in terms of trailing earnings they are cheaper than Brady’s annualized P/E from its first fiscal quarter.

Of course Brady has other businesses and even within security it’s possible that its product mix is superior to what Checkpoint and Symantec offer. However, the recent financial performance has not been good and so we’d advise against following Royce into the stock.