What Was Boring About Check Point Now Makes Stock a Buy

While cybersecurity stocks like FireEye Inc. and Imperva Inc. have crashed this year, Check Point Software Technologies Ltd. has weathered the selloff.

Shares of Check Point are up 3.6 percent this year through yesterday compared with a 2.4 percent average drop among industry peers. The Tel Aviv-based company has beaten analyst earnings estimates every quarter since 2006 while FireEye, which has yet to turn a profit after going public in September, lost 13 percent year-to-date and Imperva is down 54 percent after reporting first-quarter revenue below forecasts.

Check Point, with the highest operating margin among 20 global peers, is luring investors seeking stable cash flows after a market rout earlier this year erased about $660 billion from the value of the Nasdaq Composite Index. Companies on the gauge trade at 34.3 times earnings, compared with a five-year average of 26.8.

“They’ve already proven themselves,” Jonathan Ho, a Chicago-based analyst at William Blair & Co., said in a June 5 telephone interview. “They may not have the hypergrowth but they have a decent growth profile, with that high degree of profitability giving you very strong cash generation to support the valuation.”

Operating margin at Check Point was about 55 percent in its most recent fiscal year, meaning the maker of network security gear made about 55 cents on every dollar of revenue received after subtracting its production, selling and administrative expenses. That compares with an average of approximately 20 percent among its peers, according to data compiled by Bloomberg. Oracle Corp. had the second-highest margin, at 39 percent.

Company DNA

Check Point has been able to maintain high margins because of a “sticky” customer base built over 20 years and a strategy of selling through distributors and consultants instead of employing its own direct sales force, said Kip Meintzer, the company’s head of investor relations. Clients include Electrolux AB, the world’s second-biggest maker of home appliance, and Swiss Re Ltd., the world’s second-biggest reinsurer.

“Our goal is to not spend without driving value,” he said in a June 4 telephone interview from San Carlos, California. “It’s the DNA of the company, its maturity level and the way we approach spending money.”

FireEye declined to comment through a spokesperson, citing a regulatory quiet period. Seth Potter, an investor relations representative at Imperva, didn’t respond to an e-mail and phone call seeking comment.

‘Severe Competition’

Not everyone thinks Check Point is a safe bet. The stock is “overpriced” considering increased competition from rivals like Cisco Systems Inc., which has been making acquisitions including Sourcefire Inc. to grow its security business, according to Norman Young, an analyst with Morningstar Inc. in Chicago.

“Competition is getting more severe, which calls for more innovation from Check Point,” Young said in a June 16 telephone interview. “We advise people to buy cheaper stocks because those have a more reasonable margin of safety.”

Check Point trades at 17.6 times estimated profit, compared with an average of 15.8 over the past five years, Bloomberg compiled data show.

The company’s adjusted earnings for the first three months of 2014 rose to 84 cents a share from 79 cents a year ago. That was slightly above the average of 28 analyst estimates compiled by Bloomberg. The stock rose 0.9 percent to $67.64 at 10:03 a.m. in New York today.

Even though Check Point is facing more competition, it has an “entrenched” client base that makes it more attractive than high-growth companies that are still “priced to perfection,” said Eric Lynch, an analyst at Scotts Valley, California-based Scharf Investments LLC.

“The biggest risk factor for smaller stocks continues to be their elevated valuation,” Lynch said yesterday in a phone interview. “If you want more stable growth, and buying things with a low downside, Check Point’s fabulous as an opportunity.”

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