Company Description

Sourcefire makes intelligent Cybersecurity technologies to commercial enterprises and government agencies. The company's network security products include Sourcefire appliances for detecting, blocking, and analyzing network traffic. It also offers FireAMP, a malware protection solution that uses data analytics to discover, understand, and block malware outbreaks Sourcefire was founded in 2001 and is headquartered in Columbia, Maryland.

Sourcefire Has Seven Straight Positive Surprises

Sourcefire has topped the Zacks Consensus Estimate in seven straight quarters. The beats have been solid, with the company posting earnings that are $0.05 higher on average. Since earnings are still relatively small, it works out to an average of 145% positive surprises for Sourcefire. Following these seven positive earnings surprises, the stock has reacted positively five times. On average, the stock was higher by 3.9% in the session following the earnings report.

In the December 2011 quarter, the stock rose more than 26% following a 60% positive earnings surprise. The company reported earnings of $0.16, $0.06 more than the Zacks Consensus Estimate. Revenues of $53 million were approximately $6 more than the Zacks Consensus Estimate and represented a 39% increase from the year ago period.

Sourcefire Most Recent Reported Earnings

On April 30, 2012 Sourcefire reported revenue of $46 million, roughly $5 million higher than the Zacks Consensus Estimate and up from $31 million reported in year ago quarter, an increase of 48%. In addition, earnings per share came in at $0.02, $0.03 higher than the Zacks Consensus Estimate of a loss of $0.01. The beat of 300% pushed the stock higher by about 11% in the session following the release.

Sourcefire Sees Estimates Moving Higher

Sourcefire has seen earnings estimates move higher following the recent positive earnings surprise. The Zacks Consensus Estimate for 2012 was as low as $0.30 prior to the most recent earnings and has since moved to $0.37. That represents an increase of more than 27%.

Estimates for 2013 have also seen an increase following the most recent quarterly release. The Zacks Consensus Estimate for 2013 bumped up a penny, and are likely to move higher. Right now the current Zacks Consensus Estimate is calling for $0.53. This implies an earnings growth rate of 43%. Earning growth rates of 25% and above are great, but 40% or more are what aggressive growth investors are really looking for.

Valuation

The valuation for Sourcefire is on the high end, but most of the reason for this is the low level of absolute earnings. PE multiples for FIRE are more than 10x the industry average, and thus not what most aggressive growth investors will look to. Price to book of 7x is modestly higher than the 4x industry average. Price to sale of 8x is also higher than the industry average of 4x. Overall, aggressive growth investors will key more on revenue growth for this small cap company.

Over the last three quarters, the company has seen accelerating revenue growth. 3Q11 saw a year over year increase of 25% in revenues. The fourth quarter of that year saw an acceleration to 39% and that was followed by 48% growth in 1Q12. As the acceleration of revenue increases, earnings will likely improve and the multiples will come to be more in line with industry averages.

The Chart

A quick look at the price and consensus chart shows the dramatic growth in expected earnings. The gaps between the lines for 2011, 2012 and 2013 show that growth, with the gap between 2012 and 2013 being the largest. That is the growth in earnings that aggressive growth investors tend to look for. The growth in earnings is driven by the growth in revenue, which has been better than expected for the last several quarters. Sourcefire is a Zacks #2 Rank (Buy).

Brian Bolan is the Aggressive Growth Stock Strategist for Zacks.com. He is also the Editor in charge of the Zacks Home Run Investor service

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