CHKP (NASDAQ)

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CheckPoint Software

The hunt is on, for the stock and the sector that would not only survive this recession but also flourish in the upcoming recovery. Past recessions, market crashes and other unpleasantries have taught us that what got you in the bubble is not likely to take you out of it. While it is true that you buy low and sell high, what you buy at the low’s is lot more important than the simple act of buying. This doesn’t bode well for those wishing that their Nortel stocks would climb the wall of worry back to the 50’s, 60’s and 70’s. The wall is too high. Nor is it too clear that the PC and related companies or the cellular handset market are about to turn any time soon. In recessions, corporations and consumers alike try to delay their purchases particularly upgrades until they are comfortable with the near future. And right now the visibility into the near future is not certain at all.

Security Across the Board

There are however some clear signs, no thanks to the war in Afghanistan, that security is an area of particular concern to the public and the government, Just a few months ago, a plan to spend $200 billion on a fighter jet when the economy was headed into the tank would have faced lot more struggle. The security issues are not limited to fighter planes either. The biologic warfare will require electron guns to sterilize letters, parcels and perhaps even food and then there will be protection need for our information resources. Surely, the need to protect data that is expanding at a rate of two fold every 100 days has not gone away. When you hear of the technology slowdown, don’t confuse it with the usage of technology. It is growing at ever increasing speed. Unfortunately the overzealous corporations built capacity even faster than the demand growth.

You must be aware of the frequent virus attacks on PC’s and networks like the love bug and the Melissa virus. That is unfortunately the tip of the iceberg. They are more or less nuisance attacks on consumer-oriented markets. No, there are more serious and sinister threats to data form the likes of terrorists, industrial spies and even the crime world. They are not after your file of recipes’ on the hard drive. They are after arsenals, secret plans and product design. And naturally, there are software companies that are making a fair bit of money providing protection. The leading company, Check Point Software Technologies is setting up a perimeter around computer networks. The company's resource protection, or firewall, software shields corporate networks from internal and external unauthorized access. It verifies remote users, controls access, and blocks viruses and other unwanted Web content. Its VPN software lets companies set up virtual private networks for secure internal and remote communications. Check Point sells its products directly and through manufacturers, resellers, and systems integrators including IBM, Hewlett-Packard, and EDS. The Americas account for about half of sales. 

Once you go past the usual technical jargons and acronyms, you realize that CHKP has the largest share of the industrial and commercial information security market. Sure, they are nowhere near the behemoths like Microsoft and Oracle who could go after the market and destroy Check Point in the process. That chance seems slim. It is just possible that the company can keep growing its revenues and EPS along with the exploding need for information protection.

The balance sheet and income statement of the company is and has been pristine among all of its direct competitors. There is no debt, net margin approaches 60% and return on equity exceeds 30%. Given a high risk beta factor of 1.9, I come up with the following fundamental value of the stock;

At a risk free 91-day t-Bills rate of 4%, the company is worth $35.95 and at 5% the value is $31.50. The stock should trade at a P/E ratio of 27 to 30 times. Should the need for corporate protection of data, particularly if there is a major threat, suddenly take off, this is the stock you should be holding. Even if it didn’t it sure feels like the candidate for a turn up when we come out of this dark period.

Last Updated July 14, 2001