Is there any reasonably intelligent person who would log onto the Internet or open an email without having a strong virus protection product installed on their computer?
There are so many viruses out there already, and it seems new ones are created daily that it would be insane to expose all of the data stored on your computer to that kind of risk. In addition to my virus protection software, I also back up my hard drive to a completely disconnected drive every few days and save each day’s work to a flash drive so it is protected between full backups.
Am I paranoid? Maybe. But if you have ever lost critical data due to a destructive virus, you will understand why I do it. Interestingly enough, there are areas of our lives that are at least as important to protect toward which about 86% of the population currently pays very little attention – their very identities.
As those who regularly read my work are all aware, I love to find businesses that provide products or services necessary to our way of life. These are normally well-established household names with steady growth proportionate to the population.
It is extremely rare for me to find one of these critical businesses that is not yet seen as critical for virtually everyone. Today, I believe I have found one of those extreme exceptions. LifeLock (LOCK, Financial) provides products to identify and stop identity theft.
What is the risk of identity theft?
According to some sources, 7% of adults have their identity compromised each year with an average loss of about $3,500. The numbers are even higher if you include those who have had their identities placed at risk but have not yet experienced any damage.
On Sept. 27, 2014, the Bureau of Justice Statistics reported that, in 2014, 17.6 million U.S. residents experienced identity theft.
Have you ever had your credit card company call you to ask about “suspicious activity” on your card? I have had it happen and had to have a new card sent to me overnight to a hotel where I was staying. Fortunately, I had enough cash in my pocket to pay the dinner tab at the restaurant in which we were dining when the call came, and my card was immediately canceled.
When had my credit card number been stolen? I don’t know. How was it stolen? I don’t know. I will tell you this, the call from my credit card company didn’t scare me nearly as much as the similar call I received from my brokerage company when someone was attempting to access my brokerage accounts to transfer funds out of an account.
In 2014, Credit Sesame Daily estimated that victims spent an average of 12 hours to resolve an incident of identity fraud. That is one incident. If your identity is stolen, there will typically be multiple incidents to resolve. The hours can add up fast if you are slow to notice the problem.
How on earth has 86% of the population overlooked this real and substantial threat? I don’t know. I am glad they have, though!
How is LifeLock currently valued?
On Feb. 22 LifeLock’s stock closed at $10.62. Based on the reported earnings of 63 cents per share for 2015, the stock is trading at 16.85 times the trailing 12 months earnings. While this represents a discount to the P/E ratio of 21.46 for the Standard & Poor's 500, it is not extraordinarily cheap in my view.
The forward-looking estimates for 2016 and 2017 place P/E multiples of 14.35 and 11.29 on the shares which is a much more attractive value.
| Earnings Est. |
Current Qtr. March 16 |
Next Qtr. June 16 |
Current Year Dec. 16 |
Next Year Dec. 17 |
| Avg. Estimate | -0.07 | 0.14 | 0.74 | 0.94 |
| No. of Analysts | 8.00 | 8.00 | 8.00 | 8.00 |
| Low Estimate | -0.08 | 0.08 | 0.71 | 0.83 |
| High Estimate | -0.05 | 0.18 | 0.83 | 1.09 |
| Year Ago EPS | -0.06 | 0.10 | 0.63 | 0.74 |
While these valuations tend to run a bit on the high side for my taste, I also see this business as having a very important, even critical, product at the very early stages of almost universal adoption. Given the coming explosion in demand I see for identity theft protection when the broader population begins to understand what a nightmare it can become, I actually find the current P/Es reasonable.
They look even more reasonable when compared to the current valuation being applied to the S&P 500. At the very least, LifeLock’s current discount to the market should provide it with less downside risk than the broad market itself.
If we look at the current valuation of the business compared to the future earnings growth projected:
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If the current long-term earnings growth projections of 25.7% annualized growth are even off by 50%, it is easy to call the business fairly valued at a price to earnings growth multiple of 1 times next year’s earnings. If these growth estimates are correct, this business is undervalued by 100% and should be double its current price!
One other metric I like to review is how the business has delivered against the analysts’ estimates over the past several quarters. In the case of LifeLock, they have consistently exceeded those estimates
Having a record of beating past expectations really has little to do with future performance. It does give us an indication that the company provides the analysts with enough forward looking information to give them a reasonable chance at making accurate projections.
When the estimates are wildly inaccurate in terms of either wide misses or beats, it always makes me a bit uncomfortable in considering any kind of forward projections. Over the past eight quarters, LifeLock has been consistently close.
What is the company's current financial condition?
We can review past performance and weigh forward projections all we wish. None of it has any meaning if we allocate our investment capital to a business with a poor chance of surviving until the market recognizes its currently unappreciated value.
A quick review of LifeLock’s balance sheet from its 2015 year-end filing reveals that the company has current assets equal to only $2 million less than its total liabilities. This is a very strong balance sheet by any criteria of evaluation. I have seen better, but for a business that is looking at such explosive growth potential, this level of financial strength really gives me a great deal of assurance that the business is built on a solid foundation.
What is LifeLock's current fair value?
One of the most common metrics used to estimate fair value of a stock is its price-to-earnings growth rate. Most analysts will use a multiple of between one and two times the projected earnings growth multiplied by the current year’s earnings.
Since I like to guard my capital closely, I generally will apply a PEG of 1 times the current year’s projected earnings and 1 times the next year’s earnings to establish my fair value range. I will also use the projected growth rate in earnings from the trailing 12 months compared to the present 12-month period.
In the case of LifeLock, the projected five-year earnings growth rate is 25.7% annualized. If we apply that to this year's estimated earnings of 74 cents per share and next year’s 94 cents per share, we reach a fair value range of $19.02 and $24.16 per share.
If we use the projected year-over-year growth rates from 2015 to 2016 to 2017 instead, we arrive at $12.58 per share for 2016 and $19.98 per share for 2017.
Over the years, I have found these calculations to produce very conservative numbers, which is exactly what I want. Conservative estimates give me that extra level of safety I am always seeking for my capital.
This stock could double from its current price and I could easily make the case it was still very fairly valued on its own or compared to the broad market.
Final thoughts and actionable conclusions
Based on my view of the products the company offers and the unmet need for those products, the forward growth numbers could easily be on the conservative side. Please note here that I specifically selected the term “unmet need” rather than “unmet demand.” The reason is the need already exists, but the broad base of potential customers has not yet faced it and created the demand. That will be changing rapidly in the future as identity theft continues to grow in both the number of victims and the amount of damage inflicted.
When considering this analysis in total, it is hard for me not to find LifeLock to be a compelling buy at today’s price. Anyone buying shares today and using a stop loss order at $9 would have a potential exposure of about 15% with a potential upside of 100% or more over the next two years. This produces a reward/risk ratio of 6.67:1. I will take that any day.
Disclosure: I have sold some March 18, 2016 expiration put options with a strike price of $10 and received a premium of 25 cents per share for selling them. I am also considering opening a long position in the shares.
A third option under consideration is creating a buy/write order to purchase the shares and simultaneously sell the March 18 expiration $11 calls against the shares for about 25 cents per share.
I am seriously considering both the long position and the buy/write position that I don’t currently hold in additions to the existing uncovered put options I already sold. I just wanted to be sure all of my cards are on the table so everyone knows where I stand on this business.
