2012 was a good year for US investors, with the Nasdaq Composite Index gaining 16% and the Nasdaq 100 Index gaining 17%. Check Point Software Technologies Ltd. (Nasdaq: CHKP), however, which is included in these indices, was a big loser, falling 9.3%.
Check Point, founded by chairman and CEO Gil Shwed, provides software and hardware solutions for information and Internet security. Twice last year, the share price fell sharply, after the market was disappointed by the company's results and guidance, and it sometimes seemed that investors preferred a new star, rival Palo Alto Networks Inc. (Nasdaq: PANW), founded by former Check Point executive Nir Zuk.
Ultimately, despite Check Point's slowing growth rate (in its financials for the fourth quarter of 2012, published last week, it reported lower product sales), it posted $1.34 billion revenue for the year as a whole, 7.7% more than in 2011. Net profit rose 8.9% to $668 million.
What can we expect for the company and its share price this year? Analysts covering the stock have been responding to these burning questions.
Will growth continue to slow?
Most analysts expect a turnaround, and that Check Point's growth rate will pick up in the coming quarters. Oppenheimer Israel Ltd. says that the slowdown in the growth rate for the company's new products was due to the upgrade to products with stronger performance than previous generation products, but that while the number of units sold rose by 20%, the average price per unit fell. "This process is coming to an end, with 90% of the products already upgraded," says Oppenheimer.
Credit Suisse also believes that this process is coming to an end. Analyst Philip Winslow says that the extensive adoption of Check Point's blade products line, together with the stabilization of the average sale price, will mean renewed acceleration in revenue from these products during 2013. JPMorgan agrees, saying that the first quarter will be the turning point.
Goldman Sachs is more cautious. Analyst Greg Dunham says that part of Check Point's slowdown was due to temporary factors, and he is encouraged by the company's forecast of more rapid growth in 2013. However, he believes that raising the pace of sales could be challenging.
What is the competitive situation in the market?
The personal and emotion battle between Shwed and Zuk has resulted in remarks such as, "Palo Alto has painted a bulls-eye on my back," and, "Our product is superior to their product in every way imaginable," by Shwed; and, "Many companies, some of them our competitors, have no self-awareness," and, "Our competitors are marching as if condemned to death," by Zuk.
Palo Alto Network's share price has risen 35% since its IPO last summer, and some analysts considered it a real threat to Check Point's revenue. There seems to have been some impact on Check Point (last week, Shwed said, "I would like to say that we've won all the tenders, but that is not the case."), and there are other competitors, too. Shwed says that Check Point has increased its market share at the expense of Cisco Systems Inc. (Nasdaq: CSCO) and Juniper Networks Inc. (Nasdaq: JNPR).
Against this backdrop, UBS believes that Check Point's 2013 guidance is conservative. Analyst Brent Thill estimates Cisco and Juniper's market share at $2 billion and says that it "is up for grabs"
Citi Research analyst Walter Pritchard believes, however, that although Cisco lost market share to its competitors in 2010-11, it stopped losing share in 2012. "We expect Cisco’s increased sharpening of security go-to-market leaves less share up for grabs in 2013," he says.
What to do with the cash?
Check Point's $816 million cash flow from operations in 2012 boosted its reserves to almost $3.3 billion. The company constantly seeks acquisitions, but has not made a big acquisition in years. Meanwhile, it is mainly using the money to buy back shares, purchasing $466.2 million worth of shares in 2012, 55% more than in 2011. Shwed says that a review by the company found that its shareholders preferred the buy-back to dividends.
JPMorgan says that it hopes to see Check Point make more aggressive share buy-backs in the coming quarters, although strategic acquisitions are still a priority.
"We’ve noted that Check Point has the capacity/ability to significantly increase capital returns," says Citi's Pritchard, noting that its cash reserve accounts for 30% of its market cap.
To buy or do not to buy?
"The current pricing of the share, which is traded at a multiple of 9.6 on the 2013 profit forecast, excluding cash, is low, which we believe makes it an attractive value investment, especially in the long term," says Oppenheimer, which give Check Point an "Outperform" recommendation with a target price of $56, 13.5% above its current share price.
Credit Suisse believes that Check Point is one of the more convincing shares that it covers, and gives it an "Outperform" recommendation with a target price of $55, a 11.5% premium.
Merrill Lynch analyst Tal Liani believes that the weakness in Check Point's share price creates an opportunity. He gives it a "Buy" recommendation with a target price of $54, a 9.4% premium.
"We expect sentiment to improve as product revs stabilize in 2013," says UBS's Thill, and gives Check Point a "Buy" recommendation with a target price of $62, a premium of 25.7%.
Needham and Company, however, agrees with Clal Finance, and is not enthusiastic. Needham doubts that Check Point has growth catalysts, and believes that its share price of $48 is close to its fair value.
Check Point's share price closed yesterday at $49.34, giving a market cap of $10.2 billion.
Published by Globes [online], Israel business news - www.globes-online.com - on January 28, 2013
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