Unterberg cuts Check Point estimates
Analyst Vikram Kaura maintains a "Buy" rating, but nevertheless recommends "trimming positions" ahead of the first quarter results.
Globes correspondent 12 Apr 05 13:11
Following checks that revealed price cuts for network security company Check Point's (Nasdaq: CHKP) Integrity and Integrity SecureClient products, investment house C.E. Unterberg, Towbin has cut its revenue estimates for the company.
In somewhat contradictory advice, analyst Vikram Kaura maintains a "Buy" rating for the stock, but nevertheless recommends "trimming positions". Kaura's price target for Check Point is $26. This compares with a closing price yesterday of $22.03, at which price Check Point has a market cap of $5.47 billion.
"Our recent channel checks have revealed that Check Point cut prices of its key end-point security products Integrity and Integrity SecureClient from 2% to 30% starting April 3rd," Kaura writes.
"In our March 18th note on CHKP, we had specifically identified larger-than-typical channel discounts for these products. While we don’t know if the cuts were pre-scheduled, we do know that the original prices were scheduled to continue through late April.
" Taken together, these data suggest that demand for Integrity and Integrity SecureClient was likely weak in mid-March and continued as such entering April. In our opinion, this puts our 1Q05 estimates of $139.8 million at risk and increases the probability that guidance for 2Q05 may come-in below our expectations of $146.7 million. Consequently, we are reducing our estimates ahead of the 1Q05 results.
Unterberg has revised its first quarter estimates to $0.29 EPS on revenue of $138.7 million. The EPS estimate is in line with the analysts' consensus, while the revenue estimate just below the current consensus of $138.87 million.
For 2005 as a whole, Unterberg sees EPS of $1.21 on revenue of $588.9 million. The analysts' consensus EPS estimate is the same, while the consensus revenue estimate for 2005 is $589.42 million.
"We believe CHKP shares offer an estimated 5%-8% upside following good results (in-line numbers, guidance at or slightly above consensus) vs.10-15% downside on weak results and guidance," Unterberg's report continues. "Consequently, we are recommending caution (particularly for short-term investors) and suggesting trimming positions at current and higher levels ahead of 1Q05 results.
"For longer term investors, we’d recommend waiting until after 1Q05 results to modify positions.
"Given the strength in CHKP’s core business, a favorable competitive environment (please see our notes on CHKP dated 3/17 and 3/28), and several new products expected over the coming days, our revised estimates may eventually prove to be conservative. However, with the specific information in front of us, disproportionately higher investor focus on Zone/Integrity products, and mixed macro results so far from security and non-security vendors (end quarter business drop-off, scarcity of larger deals etc.), near term risk/reward has become incrementally unfavorable in our opinion.
"Since we initiated coverage on CHKP in late November 2004, the forward P/E valuation gap between CHKP and its peer group has narrowed. At Friday’s closing price of $22.09, CHKP traded at 2005 P/E of 18.2x (vs.sector at 21.6x, a 15% discount) and 2006 P/E of 16.9x (vs. sector at 18.4x, an 8% discount).
"Historically, CHKP has traded at 10-15% discount off forward year sector P/E. Given the current 15% discount, we are keeping Buy rating and $26 price target. However, as explained above, we believe near term risk has incrementally increased. Our price target is based on 10% discount to forward sector multiple of approximately 22x on our FY06 EPS estimate of $1.31."
Published by Globes [online], Israel business news - www.globes.co.il - on April 12, 2005
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