Tue: Check Point check-up
The slide in Check Point’s share made me decide to take a close look. I’ve never seen anything so healthy.
Shlomo Greenberg 7 Feb 06 16:51
I went over Check Point’s (Nasdaq: CHKP) financial report with a fine-tooth comb last weekend. I examined every number, shook it, held it up to the light, dipped it in water, dried it out, and examined it again. Why did I do this? Because, as someone who constantly says that, according to the results, the Check Point share offers the best economic value of all the technology companies I know (and I know a lot of them), it seemed that I must be overlooking something. Finally, I asked one of my friend Steven’s financial planners to check it out for me, because I thought that perhaps American eyes would see something that I missed. The bottom line is that everyone says that everything is fine. If only all the world’s companies reported such results, and gave such guidance. Armed with this ultimate weapon, I returned to the arena.
ICAP analyst Richard Williams reiterated his “Sell” recommendation for Check Point on Sunday, with a target price of $16.50, 21% below the current market price. What is his argument? "The four-quarter seasonally adjusted metric shows slowing in everything but services, a typical reaction slacking demand by a software vendor. We suspect that the weakness will continue into the first half of 2006, if not beyond," he says, adding that last week's GDP report, which showed government hardware/software spending growth of 3.5% versus expectations of 12%, "fully confirms our bearish outlook on the state of IT spending.”
I remind Williams and some other analysts that 3.5% is still a pretty good rise, but if they want 12.5% and get 3.5%, they are obviously very disappointed. I read what he wrote, and immediately returned to the diagram to see why this share should fall. Could he be right that Check Point’s going downhill? Let’s take a look at a few facts, and then we’ll see why this man is so sure of himself.
We’ll start with the fact that the company made a $319.6 million net profit on $579.35 million in sales in 2005. That means that for every dollar that the company sells, it banks a little over $0.55, after deducting taxes. Check Point made a $248.4 million profit on $515.4 million in sales in 2004, which means that it salted away $0.482 for each dollar in sales. From this angle, things got better, since the company’s profit margin went up by $0.07 per dollar, a 14% increase.
Williams has nothing to say about these facts, so he points out that what stood out is weakness in all Check Point’s sales items, except for customer service. I checked this, too, and the same rule applies to it that applies to 3.5% government investment in IT. He’s right about one thing. The most significant growth in the company’s business, over 34%, was in services, but this whole activity accounts for 10% of Check Point’s revenue. Heavier areas, such as software purchases, rose “only” 22%. Actually, I didn’t see even a single item that fell or weakened, so it may very well be that Williams drew conclusions about Check Point on the basis of that 3.5%. It’s not that he saw weakness; what really happened was that he expected 34% growth in all items, and that didn’t happen.
What’s more interesting is that the fourth quarter of the year was even better for Check Point. The company made a net profit of $89.24 million on sales of $156.1 million -- $0.572 for every dollar in sales. I looked, and found no trace of weakness in this quarter, either. I also checked whether such a high profit might have been the result of a slight finagling of the books; perhaps they deliberately cut R&D or administrative spending, or something else. But wasn’t so. All expenses rose. What about cash flow? First of all, they have $1.74 billion in cash, compared with $1.58 billion at the end of 2004. That’s a fine increase, especially if you take into account the $237 million that Check Point spent on buying back its own shares, plus the acquisition of Zone Labs. In short, Check Point has no problems -- at least not at the moment, and not according to anything known.
Why did the share respond so weakly to Check Point’s results? In their reviews in the press, analysts asserted that Check Point CEO Gil Shwed’s guidance for 2006 was disappointing. I also examined that claim. In a conference call after the report was published, Shwed said that the company’s sales would total $661 million in 2006, plus/minus 5%. He claimed that profit per share would be $1.40-1.47. That’s disappointing? The consensus of 655 analysts was $1.40 profit per share on sales of $655 million. Where’s the disappointment?
I read the entire transcript of the conference call by Shwed, president Jerry Ungerman, and executive VP and CFO Eyal Desheh. What they said was extremely positive. No embarrassment or difficulty of any kind was exhibited. Incidentally, the conference call appears on the www.softwarestockblog.com website. After looking at it inside and out, upside down and right side up, I reiterate I don’t know of any company that makes profits like this, that is so strong, and whose future is as secure as that of Check Point. It doesn’t matter what a few analysts who saw a fall in some place or other say.
It may very well be that the software market will suffer from a decline in investment. That’s possible, but by no means sure. The fact that Symantec (Nasdaq: SYMC) and McAfee Security for Consumers missed their guidance doesn’t mean anything about Check Point, which didn’t fall short of its guidance at all. Let those who believe that investment in software and its infrastructure is a thing of the past buy gold and oil. Let those who believe that the US will retract its investments buy a recording of President Bush’s latest speech. The rest are recommended to consider buying Check Point, because it’s still the cheapest and most economically worthwhile technology share in town.
Published by Globes [online] - www.globes.co.il - on February 7, 2006
Dubi
