Wednesday, July 20, 2011

Check Point Raises Estimates








Check Point $CHKP gave results and both revenues and earnings were above consensus. Furthermore, Check Point raised revenue and earnings estimates for the full year, and the stock responded by crashing through a 52 week high. So is everything looking positive for the stock? I think it is.

Check Point was covered in an EarningsView research report linked here and this should provide some good background for the current results. Turning to these results a few key takeaways are

  • Q3 Revenues forecast at  $300-308m
  • Full Year Revenues Forecast raised to $1.23-1.25bn vs. a previous estimate of $1.19-1.23bn in January
  • Full Year EPS forecasts raised to 277-284c vs. a previous forecast of 265-275c


Check Point Sequential Revenues

To put these numbers into context I’ve broken down the sequential revenues here.

 
(m)Q4 08Q1 09Q2 09Q3 09Q4 09Q1 10Q2 10Q3 10Q4 10Q1 11Q2 11
Revenue217.6195.0223.6233.6272.1245.1261.1273.2318.5281.3300.6
Seq growth %-10.4%14.7%4.5%16.5%-9.9%6.5%4.6%16.6%-11.7%6.9%
Cur Defer Rev290.0283.1330.0322.8384.3380.9377.0362.9424.2421.9413.4
Seq growth %-2.4%16.6%-2.2%19.1%-0.9%-1.0%-3.7%16.9%-0.5%-2.0%
LT Defer Rev40.841.932.137.441.038.937.733.440.438.643.5
Seq growth %2.8%-23.4%16.4%9.8%-5.1%-3.0%-11.4%20.8%-4.5%12.9%
Tot Defer Rev330.8325.0362.1360.1425.3419.8414.8396.3464.6460.4457.0
Seq growth %-1.7%11.4%-0.5%18.1%-1.3%-1.2%-4.4%17.2%-0.9%-0.7%



Clearly, these results are good on a historically sequential basis and, it is no surprise that revenues and earnings forecasts were upgraded. Check Point is a relatively mature business that generates high amounts of cash flow conversion and provides investors with a compelling mix of value and growth. It is often compared with the likes of Fortinet $FTNT but Check Points end markets tend to be the larger enterprises who are in need of a comprehensive Network Security solution. In addition, the company is capable of scaling up margins and cash flow when markets are good because they offer a number of ‘blades’ with different functionality. In other words, once a company buys the platform from Check Point than they immediately become a potential customer for more blades.


Frankly, Check Point is the best in class in the sector and given continued global economic growth there is no reason why the company cannot continue to generate margin expansion. The main competition for Check Point comes from Juniper $JNPR and Cisco Systems $CSCO and with the latter in a stage of restructuring, for now, Check Point looks capable of growing market share. The question is whether the stock is correctly priced or not?


Check Point Evaluation

Turning to analyst estimates of EPS of $2.78 and $3.08 it seems that Check Point is set for low double digit growth in the next couple of years. At the current price of $59.3 (an EV of $11.43bn) Check Point trades on 21x and 19.2x earnings. Although, this seems rich, the high free cash flow conversion (around $684m) means that the share presents a compelling value proposition and I think there is a 15% upside potential to the price. A target price of $67.5 seems better value and I will wait for a dip before buying back in with that target in mind.