CHKP - Check Point: Earnings Growth Poised To Continue Shares Undervalued

2023-04-27 11:21:35 ET

Summary

• Cybersecurity stocks have been weak compared to the broad market in the last year.
• With an earnings date ahead, I see shares of Check Point as a buy on valuation.
• This high free cash flow and stock buyback name has a chart that's stuck in a range, and I outline key levels to watch.

Cybersecurity stocks were seen as a safety play within the high-growth, but higher-risk tech sector. The PureFunds ISE Cyber Security ETF ( HACK ) has underperformed the S&P 500 by nearly 16 percentage points in the last year, surprising many investors. One of the fund's holdings, Check Point Software ( CHKP ), has earnings results due out on Monday.

I have a buy rating on the company based on valuation, though the trading range lately has frustrated the bulls.

Cybersecurity Stocks Losing Steam Vs. The S&P 500

According to Bank of America Global Research, CHKP provides network security solutions, selling software, hardware, and subscription services for IT security, with a focus of reducing the complexity of security management. Its hardware is based on a software blade architecture, which allows for multiple security functions to be run concurrently. Check Point sells its solutions to service providers, small and medium-sized businesses, consumers and enterprises, including all the Fortune 100 companies.

The Israel-based $15.8 billion market cap software industry company within the information technology sector trades at a near-market 19.9 trailing 12-month GAAP price-to-earnings ratio and does not pay a dividend, according to The Wall Street Journal.

With tech earnings largely coming in at solid levels, the bar might be raised on Check Point. Cybersecurity demand is seen as growing even as the industry's equities are faltering. With strong free cash flow , there are concerns that big tech companies might bring about competition from niche players like CHKP.

I like that the company has a big stock buyback plan in place and that it recently beat on earnings back in February. But what could go wrong? Competitors like Fortinet (FTNT) and Palo Alto Networks (PANW) could eat into Check Point's market share and slow upgrade cycles as a result of a poor macro environment that could ding near-term profits.

On valuation , analysts at BofA see earnings rising at a healthy and steady clip through 2025. The high single-digit EPS growth rate is about on par with the Bloomberg consensus forecast. No dividends are expected to be paid on this IT stock, but both its operating and GAAP P/Es are rather attractive considering the growth outlook. Meanwhile, CHKP's EV/EBITDA ratio is at about a 50% premium to that of the broad market.

Free cash flow is solidly in the black, and the company trades at a reasonable 14 times FCF. An earnings acceleration should support the valuation, and if we assign an 18 forward non-GAAP earnings multiple to $8.30 of the next 12-month operating profits per share, then the stock should be near $149. That's $25 above the latest stock price, hence I have a buy on valuation on this highly profitable tech firm.

Check Point: Earnings, Valuation, Free Cash Flow Yield Forecasts

Attractive Earnings Ratios

Looking ahead, corporate event data provided by Wall Street Horizon show a confirmed Q1 2023 earnings date of Monday, May 1, before market open with a conference call immediately after results hit the tape. You can listen live here . No other volatility catalysts are seen in the next few months.

Corporate Event Risk Calendar

The Options Angle

Digging into Monday's Q1 report, CHKP has a remarkable EPS beat rate history, according to data provided by Option Research & Technology Services (ORATS). The company has topped forecasts in each of the previous 12 reports, but shares have ebbed and flowed post earnings in that time, with a typical move within up or down 8%.

This time, the consensus forecast calls for $1.74 of operating earnings per share, which would be a 10% climb from $1.58 reported in the same quarter a year ago. Options traders anticipate a 4.3% earnings-related stock price swing when analyzing the at-the-money straddle expiring soonest after the May 1 report. Given a few decent-sized stock reactions in the recent past, I'm inclined to buy that premium. Let's check out the chart to see what direction may be ideal.

CHKP: Reasonably Priced Premium

The Technical Take

CHKP is confined to a trading range. Notice in the chart below that shares are stuck between $123 and $136 - an area that has held firm over the past six months. A drop below $123 could imply a target of $110 based on the measured move price objective from the current range - that would be just above the October low. A rally above $136 post-earnings would portend a target of $149 - right to me intrinsic value calculation and the early 2022 peak.

So, we're in a holding pattern. Given the cheap premium, I would consider layering on a long put at the $120 strike and a long call at the $135 strike to play an eventual bust out from the range. Longer-term investors could simply own longer-dated calls to play for a return to fair value.

CHKP: Trading Range Ahead Of Earnings

The Bottom Line

Ahead of earnings, I am a buyer of CHKP based on the valuation, though the chart is lackluster at the moment.

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