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Ticker: (Nasdaq: CHKP)
How Did It Double?
One might say that Check Point makes the Internet a safer place to do business. It would also be safe to say that the vast majority of Check Point shareholders are much better off than they once were. Almost exactly a year ago, Check Point was trading at its 52-week low of $16.50 a share. Two years ago, one could have picked up Check Point's stock for under $5 (adjusted for stock splits). Today, Check Point is trading for quite a bit more, an eye-popping 20 times higher than just two years ago.
Business Description
Check Point Software Technologies is one of the world's leaders in network and Internet security. The company specializes in providing firewalls that secure networks from viruses and unauthorized users. Check Point is also the market leader in Virtual Private Network (VPN) solutions that allow users to securely communicate with their networks via the Internet.
Financial Facts
Income Statement
How Could You Have Found This Double?
One of the ways to have found Check Point and the value it represented was to have cruised through the company's discussion board on fool.com. Looking through the most recommended posts would have shown that several people noticed that the company had many of the qualities of a Rule Maker investment. Namely, the company has stellar profit margins and has been generating a solid amount of cash flow.
Where to From Here?
It's an extremely safe bet that network security solutions of all types are going to continue to see exploding demand. All electronic commerce is dependent upon trustworthy connections and secure networks, and the sector will likely see its growth mimic that of e-commerce as a whole.
Phone: 650-628-2040
Website: www.checkpoint.com
Price (8/18/00): $127 7/8
The reason for Check Point's rise is fairly easy to pin down. The company has a leading market share in the quickly growing network security sector, a critical sector to e-commerce. Moreover, Check Point's financial performance has been nothing short of superb. Check out these figures the company reported for the second quarter:
Year-over-year Sales Growth: 81.2%
Net Income Growth: 102.8%
EPS Growth: 85.2%
Gross Profit Margin: 91.2%
Operating Margin: 48.3%
Net Margin: 48.2%
It is fairly amazing to see these healthy figures and then look back to see that Check Point was trading at roughly 10x forward earnings this time last year. The discount Check Point's shares once had is especially amazing given the company's consistent growth since its founding. Check Point is certainly hitting on all cylinders today, and its performance and positioning for the future are what has driven the stock higher.
Check Point was founded in 1993 and came public in 1996. The company is based in Israel, but the majority of its sales are made to firms in the U.S.
12-month sales: $294.6 million
12-month income: $133.1 million
12-month EPS: $0.78
Profit Margin: 45.2%
Market Cap: $22,475.1 million
Balance Sheet
Cash: $407.2 million
Current Assets: $484.3 million
Current Liabilities: $174.3 million
Long-term Debt: $1.1 million
Ratios
Price-to-earnings: 163.9
Price-to-sales: 76.3
Moreover, Check Point's fundamental positioning pointed to brighter times for the stock. The company has been a leader in a rapidly growing sector, and it has been able to turbocharge its top line by maintaining and even gaining market share against its competitors. Combine this with the fact that the company's business model, like most other software companies, lends itself to a great deal of operating leverage and, voila, profits exploded.
Check Point also looks to be well positioned against its peers in the sector. The company is now focusing on virtual private network products, and Check Point carries an impressive 52% market share in this important niche. These products will greatly increase the utility of the Internet by allowing a company's sensitive information to be shared remotely and securely with authorized users. If Check Point can maintain its market share in this niche, it should see many years of continued rapid revenue growth.
Without a doubt, Check Point is quickly becoming a Rule Maker. Check out how the company stacks up against the quantitative Rule Maker criteria, as of the second quarter:
Actual result
Gross Margins over 50%? Yes 91.2%
Net Margins over 7%? Yes 48.2%
Sales Growth over 10%? Yes 81.2%
Cash-to-Debt ratio over 1.5? Yes 2.3
Flow Ratio under 1.25? Yes 0.44
Cash King Margin Over 10%? Yes 63% (as of fiscal 1999)
Market Cap over $5 billion? Yes roughly $22 billion
Sales over $1 billion? No $294.6 million
The only real quantitative Rule Maker measure the company falls short on is in its sales, but it won't take many more quarters of 80+% annual growth before it also meets this criteria.
On the other hand, the company does not exactly meet several of the Rule Maker's qualitative criteria, such as having a dominant brand or wide consumer familiarity. That said, Check Point does carry a lot of weight within its target market of Information Technology professionals. Those interested in this emerging Rule Maker should study the company and the network security industry further in order to understand the company's true potential.
As you might expect, Check Point's stock no longer trades at an inexpensive valuation. The average estimate calls for the company to earn $1.00 per share this year and $1.37 in fiscal 2001, putting the stock at roughly 100-times forward profit estimates. While not inexpensive, one can't argue with the company's impressive positioning and stellar financials. As they say, top-shelf companies rarely come cheap.
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