Trend Micro Inc.

Trend Micro Logo

Trend Micro Inc.

Cyber Security plays can be on the expensive side in terms of fundamental valuation. However, a Japanese based firm called Trend Micro appears to be overlooked by market participants and hence could be an ideal stock to own in order to gain exposure to this positively trending sector.

In short, Trend Micro protects, detects and responds to an array of cyber security threats aimed at individual users, networks, data centers and cloud.1 Trend Micro is a global firm with sales in North America, Europe and the APAC region. Here is an introductory video from the firm’s website.

$TMICY caught my attention because of their consistently strong financial results over the past decade. After some currency conversions I arrived at the financial highlights below (In millions of USD):

TMICY Income Statement Highlights

As you can see, the cash flow generated from the Trend Micro’s business operations is far exceeding the capital expenditure needed to help the business operate/expand.

The next graphic showcases the firm has been improving their top line and bottom line throughout the last decade. After four years of low to mid single-digit declining revenues, Trend Micro has turned the corner and delivered a 3-year average annual revenue growth rate of 12.32%.

TMICY Annual USD Highlights
TMICY Revenue Growth YoY

Trend Micro’s strong gross margins have declined from 2009 but their net income margin has remained intact. Gross margins have gone from 84% in 2009 to 80% in 2018, while the net income margin has averaged 17.2% over the last ten years.

TMICY Income Statement Common Size

This consistent net income margin was accomplished in part because of declining provisions for income taxes. The provision for income taxes has decreased by 50% (from 12% in 2014 to 6% in 2018), mitigating the increase on the firms operating costs (which increased from 53% in 2014 to 57% in 2018).

TMICY Gross Profit and Net Income

Although the decline in Trend Micro’s tax provisions cannot continue down in a material way, I do expect gross margins and operating expenses to hold around their respective five year averages (82% and 56% respectively) while the firm benefits from the industry demand.

Adding to the bull case of having strong cash flow and net income generation, Trend Micro is also very shareholder friendly with their payout structure. Currently the stock yields 3.3%, which is the highest dividend yield $TMICY has had in the past 5 years.

TMICY Dividend Tracking

The chart above highlights the dividends paid each year. Note the net income has always covered the dividend payments and thus stockholders’ equity (Assets-Liabilities) has been consistently increasing.

To reiterate, Trend Micro has returned to strong revenue growth, has held on to its respectable profit margin level, pays out a large portion of earnings in the form of dividends each year and has continued to increase shareholders equity while simultaneously growing the business. I expect the firm to continue to do well in the years to come given the market demand for their services. For instance, Reuters reported that in the next five years the APAC cyber security market is predicted to grow at a CAGR of 20%.1

Now for the fundamental ratio comparison kicker. Relative to some of its better-known peers, like Palo Alto Networks Inc. or Fortinet Inc., Trend Micro looks quite attractive. Below are highlights of showcasing how $TMICY has the third lowest trailing 12 month P/E ratio and the absolute lowest trailing 12 month P/S ratio:

TMICY EPS, P/E, Market Cap

Given these facts I have high conviction that Trend Micro will continue to grow its business in the years to come and so have allocated about 3% of my trading portfolio to $TMICY. I encourage readers to give the stock a look and consider if it fits into their portfolio as well.



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