Check Point Software (CHKP)
PE 28, Market Cap $6.1 billion
Check Point Software, an Israeli company that
incorporated in 1993, develops products that enable
secure, reliable and manageable communications over
the Internet. For years they have focused on developing
Virtual Private Networks (VPNs) that protect the privacy
and integrity of network communications by establishing
confidential communication channels within the Internet
itself. They also build firewalls, which give access
control, authentication, network address translation,
content security, logging and alerting capabilities.
Interestingly, while smaller companies still allocate
about 74% of their security dollar to perimeter security
(firewalls, VPNs, etc.), Fortune 1000 companies are now
spending evenly for perimeter, infrastructure and overall
security management. Check Point is now diversifying
and addressing this broader need. That’s one reason the
stock is among the recent leaders of the IT security
group in terms of relative strength. However, it has not
gone so far so fast as to stimulate a great deal of profit
taking. In other words, it may still have a future to the
upside as an investment vehicle.
One thing we like about CHKP right now is a new
product for internal corporate security called InterSpect,
and recent reviews are laudatory. Pardon the technical
jargon, but this is what their new $9,000 box can do.
InterSpect constantly monitors all departments of an
enterprise and automatically logs events, alerts
managers and quarantines specific areas of an
enterprise (such as a sales department) if a security
threat, such as a worm or virus, is perceived.
Connections are only reinstated after security managers
take remedial action. InterSpect can also block
unauthorized applications such as peer-to-peer music
downloads or Instant Messaging. One of the areas
corporations are planning on spending the most money
in over the next 12 months is user ID and access
control. InterSpect can help with that as well. If the
InterSpect system detects an unauthorized MAC or IP
address, for example, it can block, drop or redirect the
traffic to a quarantined sub-network.
With the advent of ubiquitous wireless service and
now broadband hotspots, workers are takin’ care of
business on the fly. InterSpect can also be used as a
controlled gateway for wireless users. By the way,
Check Point has already partnered with Nokia to expand
its exposure to wireless security. Nokia’s IP network
security appliances integrate a VPN/Firewall from
Checkpoint.
Check Point recently posted first-quarter net income
of $41.9 million, or 17 cents a share, down from 24 cents
a share in the comparable period last year due to $23
million in costs related to the company's acquisition of
Zone Labs. On an operating basis, Check Point earned
$65 million, or 25 cents a share. Sales for the quarter
were $116 million, up 11% percent, with cash and
interest- bearing investments valued at $1.58 billion.
That’s not much revenue for a $6 billion company but
with such a hefty cushion of cash, CHKP has the
resources to bide its time and work carefully to position
itself for the next wave of corporate largesse.
Check Point was a darling of the tech bubble in the
late 90’s and also became one of the casualties of the
deflation of that mania. With the stunning drop in
corporate IT spending during the bear market, shares of
CHKP dropped more than 90%. The stock bottomed
along with many other tech issues in the summer of
2002 and has been on an upward trend since, rallying
about 150% over the intervening time. A number of other
IT security plays recovered much more strongly than
CHKP during that period, in part because CHKP has a
market cap in the billions. In a crowded and competitive
IT security field, the company needs to recover
significant market share to be able to increase share
price. Frankly, we do not know if the company can pull
this off, but there are some hints that they might and it
seems worth the risk.
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