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 08	Q1 09	Q2 09	Q3 09	Q4 09	Q1 10	Q2 10	Q3 10	Q4 10	Q1 11	Q2 11
Revenue	217.6	195.0	223.6	233.6	272.1	245.1	261.1	273.2	318.5	281.3	300.6
Seq growth %		-10.4%	14.7%	4.5%	16.5%	-9.9%	6.5%	4.6%	16.6%	-11.7%	6.9%
Cur Defer Rev	290.0	283.1	330.0	322.8	384.3	380.9	377.0	362.9	424.2	421.9	413.4
Seq growth %		-2.4%	16.6%	-2.2%	19.1%	-0.9%	-1.0%	-3.7%	16.9%	-0.5%	-2.0%
LT Defer Rev	40.8	41.9	32.1	37.4	41.0	38.9	37.7	33.4	40.4	38.6	43.5
Seq growth %		2.8%	-23.4%	16.4%	9.8%	-5.1%	-3.0%	-11.4%	20.8%	-4.5%	12.9%
Tot Defer Rev	330.8	325.0	362.1	360.1	425.3	419.8	414.8	396.3	464.6	460.4	457.0
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.

Anite Signals Strong Growth for 4G and LTE Spending

Ixia $XXIA and Spirent $SPT investors got an early read across from wireless and handset testing company Anite $AIE. Anite’s gave a final results statement and gave the stock market an update on how 4G and LTE deployment is taking place.  In summary on their wireless division,

‘2011 saw improved financial performance within the Wireless division, driven by both customer spending recovery and organic business growth. We believe the recovery phase is complete and that its 2012 results will be driven by business growth alone. Wireless is better positioned to take advantage of its existing and new markets than in the past and we believe that the LTE opportunity is also likely to be deeper and longer lasting than previous technologies.’

In addition, Anite talked of increased investment in 2G and 3G products as well as LTE. This augers well for the likes of Alcatel, Spirent and Ixia.

However, the key to longer term growth is the demand pull from the use of smart phones with data demanding functionality. This is particularly relevant when IP and video data is increasingly being used because it is bandwidth intensive. Naturally, this puts pressure on the network operators and handset manufacturers and testing solution providers will benefit if their customers are under pressure to invest in new technologies.

Interestingly, Anite mentioned that the demand for legacy systems has..

‘proved more sustained than expected and we continue to invest in this area.  However our main focus is currently on LTE, although the pace of change is accelerating and we are already planning for the next generation.’

Growth in the Wireless Market

 Anite referred to the longer term demand drivers here

‘Sales of smartphones are expected to grow 61% year-on-year- making the market ever more complex. While there is little growth in voice and text in developed markets, mobile data traffic is expected to grow by 6.3 exabytes (1 billion gigabytes) a month by 2015, a 25-fold increase over 2010^’

Industry Handset Production Forecast (m)	2010	2015
2G GSM	700	300
3G (WCDMA)	400	950
LTE	0	75

LTE is being deployed quicker than 3G ever was, simply because the adoption of smart phones is driving the need for a network upgrade. This is distinct from the early 2000’s when 3G was rolled out before the handset technology existed to take advantage of the network. It really is different this time.

In general, this is a very positive update and augers well for Ixia, Spirent and Alcatel. There doesn’t appear to be any slowdown in network upgrades and legacy system sales are holding up well.