Warning, downgrade hammer Rainbow shares

2 min read

Investors didn't find a silver lining in Rainbow Technologies' fourth-quarter profit warning Monday. The Internet security software developer plunged $2.94, or 25 percent, to a 52-week low of $8.50.

Late Friday, Rainbow (Nasdaq: RNBO) warned that it will return a profit of between 10 cents a share and 14 cents a share in its fourth quarter, well below the First Call Corp. consensus estimate of 18 cents a share.

"The economic slowdown resulted in lower-than-expected sales of Rainbow's secure software distribution products and Internet performance enhancement solutions," the company said in a prepared release.

Rainbow said a higher level of investment and currency losses than anticipated also contributed to the earnings revision.

On Monday, SunTrust Equitable Securities analyst Sean Jackson cut the stock from a "strong buy" rating to "neutral," saying it was too early to make any sweeping judgments about the company or its stock until after its Feb. 28 earnings report.

Tomas Isakowitz, an analyst at Janney Montgomery Scott, said that while the company's SSL security software has promise, the slowing economy and reduced information technology spending by key PC makers such as Hewlett-Packard (NYSE: HWP) has taken its toll.

"They have a compelling story in their SSL line, but obviously it's not growing at the rate they had hoped," he said. "Rainbow has four different lines of business. That's great when business is booming and the economy is doing well but it becomes much more of a challenge to manage these four lines when the economy slows."

Isakowitz rates the stock a "hold" and maintains a 12-month price target of $12 a share.

In its release, Rainbow executives said they were optimistic concerning its 2001 operating results, but cautioned that the company's growth for the next two quarters could be slower due to current market conditions.

Last quarter, Rainbow posted a profit of $4.6 million, or 17 cents a share, on sales of $43.7 million.

Analysts are forecasting a profit of 80 cents a share in fiscal 2001 on sales of $210.5 million.

The stock peaked at $27.06 in November before slipping to Monday's 52-week low.

Two of the four analysts following the stock rate it a "buy" while the other two rate it a "hold."