Check Point Software Technologies Inc (CHKP)

[midastouch017]

Check Point, ahead of the report
17.4.2005 / 15:17
Shirley Yom Tov

Usually if a stock tanks ahead of the company's financial statement, the conclusion is investors are worried, and prefer to ditch rather than stay on the fence.

On Friday, Check Point Software Technologies (NASDAQ:CHKP) stock shed 4% on heavy turnover. Were investors fretting about its impending report, or merely punishing it together with the rest of the tech sector?

Probably not. Nasdaq did retreat by 2% and other weighty Israeli tech stocks also sank: Teva Pharmaceuticals (TASE, Nasdaq:TEVA), Amdocs (NYSE:DOX), ECI Telecom (Nasdaq:ECIL), Comverse Technologies (NASDAQ:CMVT) and Mercury Interactive (Nasdaq:MERQ). None were spared.

Tomorrow Check Point will make matters clearer, by filing its financials for the first quarter of 2005.

The year 2005 is expected to be a record one for the Israeli data security company, with 14-16% revenue growth to $585-600 million, and a profit per share of $1.18-1.24, or $325 million to $340 million.

If accurate, those figures will leave 2001, so far its best year, in the dust. It had posted sales of $527 million for that year, before the great tech crash.

The first quarter is traditionally a weak one for software companies, so actually Check Point's figures are expected to be below its fourth-quarter 2004 ones. Then it netted $70 million or 30 cents per share.

The company has guided investors to expert first-quarter sales of $136-140 million, and earnings of 28-29 cents per share. That would be 17-20% above the parallel quarter of 2004.

Unterberg: Scale back position in the share

As one of Israel's most prominent companies on Wall Street, Check Point is covered by 30 investment banks. Their average forecast is about $130 million revenues in the first quarter, and pro forma earnings of 29 cents per share.

Hitting the upper line of the company's guidance indicates the analysts feel Check Point was conservative. A sample of six investment banks found that five – Merrill Lynch, Piper Jaffray, Oscar Gruss, Kaufman ad Wedbush – think Check Point will meet or beat the forecast. Only Unterberg thinks otherwise and advised investors it feels the first-quarter forecasts are in danger.

Unterberg is concerned because it believes Check Point slashed the prices of products to achieve secure access to enterprise systems from remote endpoints. It's a line of products partly based on solutions from Zone Labs, which Check Point acquired. Unterberg spoke of price cuts ranging from 2% to 30% but couldn't say when it happened.

But the figures indicate weak demand for the products, which Unterberg feels may cause the company to fall short of first-quarter expectations, and to disappoint in the second quarter as well. They suggested investors scale back their holdings in Check Point ahead of the company's financial statement release.

None of the other investment banks share Unterberg's sentiment: if anything Kaufman Bros expects stronger than expected results regarding Zone Labs' integrity products. They expect Check Point to beat the consensus and to achieve $139 million sales in the quarter.

Wedbush foresees a 1% slip in revenues against the previous quarter, to $139.8 million, which would beat the company's own guidance. The investment bank's recommendation remained Buy, a sentiment echoed by Oscar Gruss and Merrill Lynch.

Piper Jaffray also expects an upside and reassures investors that it is not expecting slow sales in Europe. Its forecast is the highest: turnover of $142.1 million and 30 cents per share earnings.

The investment banks' 12-month price targets are high: Piper Jaffray's is $31, which is a cool $42 above the stock's Friday closing on Nasdaq. Yet Check Point stock has sunk 13% since February began.

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Midas