Belden (BDC) Jumps 7% on $710 Million Tripwire Deal

by Ryan Fitzwater, Director of Research, The Oxford Club
cybersecurity

The big news on the street today is Belden’s (NYSE: BDC) buyout of cybersecurity firm Tripwire with a price tag of $710 million.

Belden, a networking and cable product provider, stated it expects to close the deal in the first quarter of 2015.

The buyout of the privately held software security company is strategic move to provide cybersecurity solutions to Belden’s large and well-established customer base. And with all the news and concerns constantly surrounding data breaches at major retailers and banks, there is no doubt cybersecurity is in high demand.

The deal itself is not surprising considering Tripwire and Belden announced a partnership three months ago to join forces to improve infrastructure security in manufacturing organizations.

And investors seem to already favor the deal as shares have popped 7% this morning.

But as you can see, Belden has underperformed the broader market year to date, nothing shareholders want to write home about. In the last four quarters, the company has seen three quarters of earnings growth (two of those in the double digits) with one quarter of negative growth. The Tripwire deal could bring in new sources of revenue that could jolt the stock price back to life.

Belden stated the deal will add $0.65 per share to its adjusted income from continuing operations in 2015.

The deal seems to have Wall Street’s approval and holds strategic merit since the company can start leveraging new productions and solutions to its current customers. But the future is never clear.

For current and potential investors excited about the buyout, it would be wise to gauge Belden’s current financial health before jumping into the stock.

And we can start the gauging process by seeing how the company performs on our customary Investment U Fundamental Factor Test.

Earnings-per-Share (EPS) Growth: In the most recent quarter, Belden saw earnings pop 16.42%. Always good to see double-digit growth.

Price-to-Earnings (P/E): Belden’s current P/E of 27.26 is right in line with the industry average. And on a forward basis, it is very attractive. Belden’s forward P/E (what it expects to make in the next two quarters blended with the previous two quarters) is 15.43, well below the industry average of 22.67.

Debt-to-Equity : Belden operates in a capital intensive industry, where companies tend the have higher leverage ratios. While the industry averages a 121.7% debt-to-equity ratio, Belden’s is much higher, sitting at 183.86%. That is well above the industry standard and is not something we want to see.

Free Cash Flow per Share Growth : In the last quarter, Belden saw free cash flow drop 20.58% per share. And positive free cash flow will be hard to achieve in the immediate future considering that it has to fork over $710 million to buy out Tripwire at the beginning of 2015.

Profit Margins : Belden’s profits margins currently sit at 5.54% while the industry average is more than double that, sitting at 11.71%. The Tripwire acquisition could help boost margins, but it isn’t there yet.

Return on Equity : Unfortunately, Belden closes out the last metric with another miss. Its ROE is 9.87%, slightly below the industry average of 11.12%. Close but no cigar.

While Belden’s buyout of Tripwire gives the company a new line of solutions and products to offer in a budding cybersecurity sector, it has some work to do to get back in the game with its peers.

*Why did we look at these specific metrics? Find out more here.

Fundamental Factor Test Score

D: Hold with Caution (Only meets two key metrics)

 

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