It's "Gut-Check" Time for Check Point

Check Point (NASDAQ: CHKP  ) investors have become insecure ever since the company reported disappointing fourth-quarter earnings. Consequently, the stock has been in a lull ever since. Complicating matters is that new entrants like Palo Alto Networks and Sourcefire are generating considerable buzz.

While Check Point still has a sizable market lead in enterprise network security, investors are unsure of what to make of the company's recent lack of momentum. Some are suggesting that Check Point's "tech card" should be revoked after the company posted just 3% revenue growth in the fourth quarter, marking the seventh consecutive quarter of sales declines. Now, with Sourcefire only percentage points from a new 52-week high, and Palo Alto posting strong revenue numbers, it's become "gut-check" time for Check Point.

Should investors wait or abandon the stock?
This decision really depends on where you are in the position. Unfortunately, Check Point does not offer a dividend to help pacify the time, which makes being patient more difficult. But this, too, has its limits. And, when compared to Fortinet, which posted a 25% revenue increase in Q4, Check Point’s numbers were even more disturbing. But there's hope.

Working in Check Point's favor is its strong management team, which did an excellent job navigating the company through last year's challenges, which included soft enterprise spending and a brutal fiscal European environment. But those were last year's problems. Besides, these issues didn't seem to affect Cisco or Fortinet, which have similar exposure.

Then, again, set aside the recent growth struggles, and glance at Check Point's fundamentals; you may not find a more attractive company. The top line is unappealing, yes. But the bottom line is a different story. Check Point is still growing profits at an annual rate of 9%. Again, this speaks to the quality of management that the company has – one that is able to do more with less. This means that, despite soft sales, and possible loss of share to the likes of Cisco and Fortinet, management is making each sale that it does get, count.

What's more, it also demonstrates how highly regarded Check Point is in enterprise security. The fact that the company is able to still target higher margin businesses means that Check Point is not succumbing to pricing pressure despite the aggressiveness of Palo Alto and Sourcefire. That said, management must still get revenue going in the right direction again. Otherwise, investors will begin to question if the premium they are paying today is deserved -- at least when compared to Cisco. 

Time to get more aggressive
The enterprise security space is pretty significant. Plus, with continued adoption of mobile devices within BYOD, or bring-your-own-device, this will only increase the demand for more security. However, though, it doesn't appear as if Check Point cares much about growth. It sounds like a ridiculous claim, but the evidence has not been there. And the company has underinvested in some key areas.

For instance, aside from buying Dynasec in 2011, Check Point has not been aggressively expanding its enterprise footprint -- at least not to the extent of Cisco. And Check Point has done very little to seek new addressable markets, or put efforts to expand on what it already has. Good cost management can only be effective for so long. At some point, the cash flow will diminish. And I worry that management cares too much today about the books, and not enough about growth.

Why else would the deceleration of growth continue for so long? Management can't afford to sit idle and allow Cisco and Fortinet to run away with the market. It's also alarming (pun intended) that the sales declines continue despite the launch of several new products. So, how can it make sense that the company, despite what seems as bleeding market share, still manages to spend less in the recent quarter on sales and marketing?

Meanwhile, not only did Fortinet report a 20% increase in sales and marketing, but Fortinet also increased research and development expenses by 25%. By contrast, Check Point only spent 8.8% on R&D. This lack of aggressiveness can't work in the long-term, and it's going to bite.

Things could be worse
Granted, I didn't exactly paint a great picture for Check Point. But there are still some opportunities here. That Check Point is still a leader in the market is one significant advantage. Plus, the company still has a strong base of users, and a balance sheet with $1.5 billion in cash with zero debt. Not to mention $202 million in cash flow. I'm not suggesting that this makes everything better. But, given its strong cash flow, this company just might be one good acquisition away from being exciting. But don't hold your breath.

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