Pat McKeough recently replied to a Member of his Inner Circle looking to tap into the growing need for cybersecurity, and asking specifically about the prospects of Check Point Software. The company has seen its revenues rise for the past five years and it invests a healthy portion of its revenue in productive research spending. It continues to add customers around the world and recently released a new product for broad-based security. The market for cybersecurity is growing fast, says Pat, but so is the competition.
Q: Pat, I’m looking to invest in cybersecurity: What is your opinion on Check Point Software? Thank you!
A: CHECK POINT SOFTWARE (symbol CHKP on Nasdaq; www.checkpoint.com) designs and makes firewall security systems to protect computers and mobile devices from online attacks.
The company generates 45.3% of its revenue from software updates and maintenance; 29.0% of its revenue from products and licenses; and 25.7% from software-as-a-service subscriptions.
Check Point first sold shares to the public at $14.00 a share and began trading on Nasdaq on June 29, 1996.
The company’s revenues have risen steadily over the last five years, despite a rising U.S. dollar, which has hurt the contribution of its overseas sales. Overall sales have increased from $1.3 billion in 2012 to $1.7 billion in 2016. Per-share earnings have moved up steadily as well, from $2.96 in 2012 to $4.22 in 2016.
The company’s revenue for the three months ended June 30, 2017, rose 8.0%, to $459.0 million from $422.7 million a year earlier. That’s mostly thanks to growing demand for its subscription-based firewall services.
Earnings, excluding one-time items, increased by 11.6% in the latest quarter, to $212.0 million from $190.0 million. Per-share earnings rose 16.0%, to $1.26 from $1.09 a share, on fewer shares outstanding.
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Growth Stocks: Sales to Europe and other overseas markets growing fastest
Check Point’s strong balance sheet gives it plenty of room to keep developing new products. As of June 30, 2017, it held cash and investments of $1.6 billion, or $9.79 a share. It had no debt.
The company uses some of its cash to buy back shares. In the second quarter, it repurchased 2.3 million shares for $248 million.
Check Point is in a fast-growing, but highly competitive market. However, the company continues to improve its existing products and develop new ones. In the latest quarter, it spent $46.3 million (or a high 10% of its revenue) on research.
In the last quarter, the company launched its newest product, Check Point Infinity, its consolidated cyber security platform designed to prevent attacks across the full spectrum of cyberspace: networks, clouds and mobile.
Check Point has also added more customers worldwide. It now sells 47% of its products and services in the Americas. Sales to Europe (38%) and the rest of the world (15%) are growing the fastest.
The stock trades at 21.0 times the $4.95 a share that the company will likely earn in fiscal 2017.
Inner Circle recommendation: Check Point Software is okay to hold for aggressive investors.
For our recent report on a Canadian growth stock that we rate as a buy, read A boom in pilot training will lift this stock.
For our views on a questionable category of growths stocks, read Are new stock issues a good deal for investors, or a risky investment?
