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Zack’s Bull of the Day: Vasco Data Security

Vasco Data Security International (NASDAQ:VDSI) is a $900 million global provider of enterprise security products and software services which manage access to computer systems of corporate and government customers.

The company’s authentication and e-signature solutions enable secure financial transactions made over private enterprise networks and public networks.

Vasco’s software and hardware products provide 10,000 organizations in more than 100 countries, including approximately 1,700 international financial institutions, with strong, flexible and effective Internet and enterprise security solutions.

Big Earnings Surprises

Vasco shares are up 200% in the past year because of two strong trends. First, the demand for cyber security became paramount after major corporate breaches made headlines, from Target (NYSE:TGT) to JPMorgan (NYSE:JPM).

Second, the company answered the call for greater security with products that met the need and earnings grew dramatically. While sales are expected to grow about 24.5% in 2014, of which the final quarter report is due February 17, EPS is expected to rise 87.5%.

And here’s how surprised the analysts were in their profit projections…

But the Bears Don’t Believe

Even with this stunning display, many don’t believe the company will keep delivering. Short interest in VDSI shares grew by nearly 40% in the first two weeks of January from 3.58 million shares to 5 million.

That took the short interest as a percentage of the float to over 17%. Maybe the skepticism is over the fact that only 8% of Vasco’s revenues in the September quarter came from the US. Or maybe it’s that their revenue is considered “lumpy” because financial institutions have more temporary needs than recurring ones.

Smoothing Out The Lumps

Here’s what analysts at Topeka Capital Markets said in December when they raised their price target on VDSI shares to $35…

“The most often mentioned investor concern directed at Vasco has been the lumpiness in the business driven by the fact that 85% of revenues come from banks who tend to move in and out of large projects.

“That has not gone unnoticed by Vasco management which is re-balancing the business from hardware (tokens, readers) to non-hardware (maintenance, server licenses, mobile) with good progress to date as nonhardware has increased from 20% of revenues in 1Q12 to 31% in 3Q14.

“Hardware will always be an important revenue contributor as a number of international markets favor/require hardware-based authentication solutions as opposed to mobile — at least for now. Three newly introduced products are positioned to push the business towards recurring revenues.”

As we look ahead to the Feb 17 quarterly report that will answer all these questions, at least one bull is buying after the stock’s 25% decline from all-time highs above $30. In an SEC 13G filing from January 26, BlackRock Inc. revealed having bought nearly 2.9 million shares in the middle of the month.

Given that Vasco is expected to earn $0.96 this year — representing 28.7% EPS growth and a 23X forward multiple while many cyber-security peers like FireEye (NASDAQ:FEYE) are profitless — only those bears might be surprised by another big earnings beat.

Kevin Cook is a Senior Stock Strategist for Zacks where he runs the Follow The Money (FTM) portfolio.

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