It's been a wild ride in the market the past two months with dour headlines from Europe pushing the market down and central banks pushing it back up by reminding everybody they're ready to act. The volatility can be tough on the nerves, but it also means the market is throwing some values our way.
With close to 80% of the international-focused Orange Portfolio in cash and more money to invest coming in, I'm positioned too defensively despite all the volatility. So I'm happy to see bargains creeping into the market and ready to start building positions in some of them.
Network security expert Check Point Software Technologies (Nasdaq: CHKP) has seen its shares fall 23% since April, but still has a great business with plenty of growth potential. It also has a rock-solid balance sheet and a history of share repurchases. With its shares back at an attractive valuation, I'm ready to buy.
Why I'm buying Check Point
I love businesses with recurring revenues, and growing subscription revenue is what Check Point is all about. Check Point keeps the cash coming in by using a razor-and-blades model for its network security offering. The company's security appliances are the razors that bring in a healthy chunk of revenues, while the blades are the software customers buy to enable different types of protection on their networks. Since the need for security never goes away that leads to a recurring stream of sales for Check Point and increasing sales as companies look to beef up their network security against new threats.
Check Point moved to the razor-and-blades model in 2009 with the introduction of new gateways and it's led to steady growth. In the last three years Check Point has averaged 16.4% revenue growth, but blade sales are actually growing more quickly. Check Point doesn't break its blade sales out separately, because it hasn't hit the point where it has to, but on conference calls management has indicated that they're growing more than 30% per year.
An attractive valuation
Revenue growth is great, but it isn't really impressive unless profit is growing rapidly, too. Check Point doesn't disappoint here as operating earnings and cash flow from operations have grown at an average of 20% per year over the last three years. That's a little bit faster than sales growth, which could slow if the economy continues to soften. But with the shares at 13 times cash flow they're already priced for slower growth, and Check Point's $1.3 billion of cash and no debt allow it to ride out a tough economy while continuing to invest in R&D for future growth.
What could go wrong
While companies don't rip out their gateways and overhaul their network security often, it can happen. Cisco (Nasdaq: CSCO) goes after the market by integrating similar functionality into its routers. This works for some customers, but generally the integrated products aren't grabbing as many customers. The other competitive threat is from Sourcefire (Nasdaq: FIRE), Fortinet (Nasdaq: FTNT), and other smaller upstarts. To date they've seen success and I have them on my watchlist, but Check Point's growth is just as impressive and I think it offers a much better value now.
What's more likely to get in the company's way in the near term is the economy. Companies can delay upgrade decisions for their networks and risk falling behind hackers and other threats in the technology arms race. With 39% of sales coming from Europe this is a real risk, but one I'm comfortable with taking at the current price.
Wrap up
The market may throw a little more volatility our way in the coming weeks, but with consistent cash flows and a very reasonable valuation I'm happy to add Check Point to the Orange Portfolio. Check Point's business model allows its customers the flexibility to buy only what they want when they need it, while getting a top-tier security solution. This also provides Check Point with the security of a steady stream of recurring revenues and the ability to incrementally add new features to its products. The win-win cliche is tired and rarely true, but it seems apt in this case as Check Point's growth backs it up.
