Margins matter. The more Check Point Software Technologies (Nasdaq: CHKP) keeps of each buck it earns in revenue, the more money it has to invest in growth, fund new strategic plans, or (gasp!) distribute to shareholders. That's why I check on my holdings' margins at least once a quarter. I'm looking for the absolute numbers, comparisons to sector peers and competitors, and any trend that may tell me how strong Check Point Software's competitive position could be.

Here's the current margin snapshot for Check Point Software and some of its sector and industry peers, and direct competitors.

Company

TTM Gross Margin

TTM Operating Margin

TTM Net Margin

Check Point Software

88.1%

46.9%

39.7%

Microsoft (Nasdaq: MSFT)

80.2%

39.5%

30%

Intel (Nasdaq: INTC)

63.4%

33.7%

23.1%

Fortinet (Nasdaq: FTNT)

73.3%

12.7%

22.3%

Source: Capital IQ, a division of Standard & Poor's. TTM = trailing 12 months.

Unfortunately, that chart doesn't tell us much about where Check Point Software has been, or where it's going. A company with rising gross and operating margins often fuels its growth by increasing demand for its products. If it sells more units while keeping costs in check, its profitability increases. Conversely, a company with gross margins that inch downward over time is often losing out to competition, and possibly engaging in a race to the bottom on prices. If it can't make up for this problem by cutting costs -- and most companies can't -- then both the business and its shares face a decidedly bleak outlook.

Of course, over the short term, the kind of economic shocks we recently experienced can drastically affect a company's profitability. That's why I like to look at five fiscal years' worth of margins, along with the results for the trailing 12 months (TTM), the latest fiscal year, and the latest fiscal quarter (LFQ). You can't always reach a hard conclusion about your company's health, but you can better understand what to expect, and what to watch.

Here's the margin picture for Check Point Software over the past few years.


(Because of seasonality in some businesses, the numbers for the last period on the right -- the TTM figures -- aren't always comparable to the FY results preceding them.)

Here's how the stats break down:

  • Over the past five years, gross margin peaked at 95.7% and averaged 92.6%. Operating margin peaked at 57.9% and averaged 47.3%. Net margin peaked at 55.2% and averaged 44.1%.
  • Fiscal-year 2009 gross margin was 88.6%, 400 basis points worse than the five-year average. Fiscal-year 2009 operating margin was 45.9%, 140 basis points worse than the five-year average. Fiscal-year 2009 net margin was 38.7%, 540 basis points worse than the five-year average.
  • TTM gross margin was 88.1%, 450 basis points worse than the five-year average. TTM operating margin was 46.9%, 40 basis points worse than the five-year average. TTM net margin was 39.7%, 440 basis points worse than the five-year average.
  • LFQ gross margin was 88.6%, 90 basis points better than the prior-year quarter. LFQ operating margin was 47%, 420 basis points better than the prior-year quarter. LFQ net margin was 39.4%, 560 basis points better than the prior-year quarter.

With recent 12-month-period operating margins below historical averages, Check Point Software has some work to do. There may be some hope in the latest quarter's results, but only time will tell.

If you take the time to read past the headlines and crack a filing now and then, you're probably ahead of 95% of the market's individual investors. To stay ahead, learn more about how I use analysis like this to help me uncover the home run stock you're too afraid to buy.

Seth Jayson had no position in any company mentioned here at the time of publication. You can view his stock holdings here. He is co-advisor of Motley Fool Hidden Gems, which provides new small-cap ideas every month, backed by a real-money portfolio. Intel and Microsoft are Motley Fool Inside Value recommendations. Check Point Software is a Motley Fool Rule Breakers pick. The Fool owns shares of and has written puts on Intel. Motley Fool Options has recommended buying calls on Intel and a diagonal call position on Microsoft. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.