Investors cheer Check Point
But the Q2 results still leave some analysts uncertain about growth.
Ben Bezalel 20 Jul 05 17:38
Investors gave Check Point (Nasdaq: CHKP) a strong vote of confidence yesterday after the release of its second quarter results. The share price rose 6.57% to close at $23.04, giving the Internet security company a market cap of $5.64 billion.
The response from the analysts however shows that they are still not uniformly confident about Check Point's long-term growth prospects.
For Citigroup Smith Barney, for example, Christopher DeBiase writes, "The company continues to show the ability to grow EPS. However for the earnings multiple to expand we believe that the company must show the ability to drive the bottom line through top line growth.
"We are more concerned once again with revenue growth as Product revenues remain lackluster in the mid-single digit range for the second straight quarter and Subscription revenues were lighter than expected and had the lowest quarter-on-quarter growth in 4 years."
DeBiase rates Check Point "Hold", with a $25 price target. "We are increasing our 2005 EPS estimates to $1.27 from $1.24 but leaving our 2005 revenue estimate at $590 million. For 2006 and 2007,our new estimates are $642 million/$1.35 and $684 million/$1.45, respectively."
Hernandez lowers his 2005 revenue estimate from $591 million to $588 million, but raises his EPS estimate from $1.24 to $1.27. For 2006, he sees EPS of $1.40 on revenue of $647 million.
Merrill Lynch's Edward Maguire and Garrett Bekker see good short-term prospects for the stock, but say "acceleration in growth is likely to take more time." They rate Check Point "Buy", with a price target of $25.
"While overall revenue growth of 14% is healthy, product growth of 5% year-on-year needs to accelerate to drive multiple expansion. While operating efficiencies and share buybacks benefit earnings growth, we think Check Point may need to be more aggressive to broaden the market opportunity to outpace steady pricing erosion in the core Firewall/VPN market," they write, to a large extent echoing DeBiase's concerns. "Nonetheless," they add, "we think Check Point remains well positioned to benefit from favorable secular trends."
As for their estimates, Maguire and Bekker say, "We are adjusting our model to reflect improved R&D efficiencies and lower share count. We are leaving 2005 revenue estimates essentially unchanged at $591.9 million (versus $591million previously) and raising EPS to $1.27 from $1.23. We are raising 2006 revenue estimates modestly to $644.6 million from $641.5 million and increasing EPS by $0.03 to $1.36."
For Lehman Brothers, Israel Hernandez, who rates Check Point "Overweight" with a price target of $30, focuses more on the Wall Street side of things. "With the stock attractively trading at 17 x 2006 estimated EPS of $1.40, we believe shares should continue to move higher given solid Q2 results, an upward revision to street EPS estimates, on-going share buybacks and expectations of a second half 2005 rally," he writes.
CIBC World Markets analyst Avivit Mannet-Kalil is similarly aggressive on the stock, rating Check Point "Sector Outperformer" with a price target of $30, the same as that of Hernandez. "Check Point's second quarter 2005 results show that the company has the right tools and the right standing to continue presenting growth in sales, profits, and cash," she writes.
"We believe that the current price levels at which the stock is traded, around $23, giving a p/e ratio of 16 on 2006 estimates, do not properly reflect the degree of potential for the future."
In contrast to the worries of other analysts about Check Point's business performance, Mannet-Kalil points out some positive business indications in Check Point's financials. "The proportion of large deals, over $50,000, rose substantially, from 24% in the previous quarter to 30% in the current quarter. This rise indicates high technical capability and preservation of market share among high-end customers.
"30% of total product sales are sales of new products, amounting to some $21 million. Sales of Smart Defense services as a proportion of subscriber revenue also strengthened.
"Excluding recent acquisitions, Juniper's sales of security products rose just 1% in the second quarter of 2005, by about $89 million, which is a good sign for Check Point's business," Mannet-Kalil writes. Her estimates are for $1.28 EPS in 2005, and $1.41 in 2006.
Ehud Eisentein of Oscar Gruss is also upbeat. "An expanding market, robust financial metrics and the ongoing introduction of new products that are garnering solid market acceptance support our continued optimistic view on CHKP," he writes.
"We point to two separate catalysts that we believe could drive CHKP’s shares in the future: (1)accelerated revenues growth, which would indicate that the company can grow outside the Firewall/VPN space, and (2) new acquisitions.
"Currently, we think the odds are more heavily stacked towards the latter scenario materializing, based on the successful acquisition and integration of ZoneLabs that should increase management’s appetite for more M &A activity.
"We reiterate our Buy rating and price target of $28. Our price target is derived by applying a 21.8x multiple to our 2005 EPS estimate of $1.28, which represents a 22.5% discount to the average multiple of CHKP’s security peer group."
Eisentein's 2006 estimate is slightly reduced, to $1.35 EPS on $645.4 million revenue from $1.36 on 650.1 million.
Published by Globes [online], Israel business news - www.globes.co.il - on July 20, 2005
Dubi
