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Why Check Point Software Is Ready to Rebound

Sean Williams
July 10, 2012

Shares of Check Point Software Technologies (Nasdaq: CHKP  ) hit a 52-week low on Monday. Let's take a look at how it got there and see whether cloudy skies are still in the forecast.

How it got here
Figuring out why a company has hit a 52-week low sometimes isn't as easy as it looks. In Check Point's first quarter, it reported revenue growth of 11.3% and gross margin expansion of 180 basis points, and saw a doubling of major orders. Figures like these wouldn't normally be conducive to share-price weakness.

The real reasons Check Point shareholders have remained apathetic are its guidance, which remained unchanged after the first quarter (many investors were looking for an earnings boost), and the fact that 39% of its business originates in Europe. Last I checked, Europe was dealing with a debt crisis of epic proportions, which could necessitate a spending slowdown from businesses of all sizes.

However, putting these fears aside for a moment, look at this from a logical perspective. Check Point's software provides the security backbone for information technology systems; it's not something you can simply choose to put off buying until a later date. No company, no matter how big or small, wants to deal with security threats, so Check Point's software is a near-necessity item (at least once the company gets a customer hooked). Check Point has done a marvelous job in encouraging customer upgrades and retaining existing customers, which has led to good cash flow stability.

As the Fool's Nathan Parmalee noted in June when he made Check Point a real-money buy in his Motley Fool portfolio, Check Point's upgradable options (the blades in the razor-and-blades comparison) are what keep its customers hooked and are the driving force behind Check Point's recurring revenue and high operating margins. Check Point's blades are also a reason it's been able to successfully take IT-security market share from networking giants Cisco Systems (Nasdaq: CSCO  ) and Juniper Networks (Nasdaq: JNPR  ) , whose built-in security isn't a one-type-fits-all for enterprise customers. This gives Check Point a more powerful value proposition in this niche area compared to its larger peers.

How it stacks up
Let's see how Check Point Software stacks up next to its peers.

CHKP Chart

CHKP data by YCharts

Smaller players like Fortinet (Nasdaq: FTNT  ) and Sourcefire (Nasdaq: FIRE  ) have outperformed Check Point recently, with Cisco bringing up the rear as it revamps its product line.



Price/Cash Flow

Forward P/E

5-Year Revenue CAGR

Check Point Software 2.8 11.3 11.8 16.8%
Cisco Systems 1.7 8 8.6 8.7%
Fortinet 8.1 24 34 22.9%*
Sourcefire 6.2 48 48.9 29.8%

Sources: Morningstar, author's calculations. CAGR = compound annual growth rate. * 4-year CAGR used.

The first thing you'll notice is that the much smaller Fortinet and Sourcefire are growing pretty quickly. But considering how small they are, that's not really a surprise. What does take me by surprise is the valuations these two com