2023-10-19 14:08:22 ET
Summary
- Check Point Software Technologies is a high-quality cybersecurity company based in Israel with minimal debt and lots of cash.
- The company has been rated as the number one and two most trustworthy provider of cybersecurity and software with an enviable record of profitability and momentum.
- Despite the ongoing war in Israel, the impact on Check Point's shares has been minimal, and we expect the company to continue growing.
First Class Company
Since the October 7 th Hamas invasion of Israel, we have focused on Israel-based public companies listed on an American stock exchange. We believe many of the stocks are oversold in reaction to the news and comments from pundits. Our attention in this piece, which is our second article on this subject for Seeking Alpha, is on the second largest, by market cap, company in the country: Check Point Software Technologies Ltd. ( CHKP ).
Our last article about Check Point appeared in May ’22. Since we assessed Check Point as a Buy opportunity in that article, the share price rose from $127 to open on the 14 th day of the invasion at $135. Our assessment has not changed, and we foresee the stock as an excellent potential for retail value investors. In our opinion, this is a high-quality company in the high-tech industry, based in a country known for nurturing the growing cybersecurity industry.
Check Point stands at the forefront of cybersecurity tech services and software. We believe there is excellent potential on the upside. The stock remains a long-term Buy opportunity for retail value investors, especially on any dip in price as the war might escalate. It is rated by Newsweek, as the number one and two most trustworthy provider of cybersecurity and software, respectively, among the World’s Most Trustworthy Companies in 2023. Forbes ranks Check Point for the 4th consecutive year as the number of the best employer in the world of cybersecurity companies “for its strong company culture, gender equality, and corporate social responsibility.”
The stock is up about 21% in the last 5 of its 30 years. In the previous 12 months, the shares are +20.5% and almost 7% YTD. The share price fell to $120 in May ’23 but hit near its 52-week high of about $138 in late September ’23. The Dow Jones Industrial Average ETF Trust ( DIA ) is up about 10% over the last 13 days. The Tel Aviv-35 Index is -7%, comparable to the slip in Check Point’s share price since the entire country mobilized.
War’s Minimal Impact on Shares
During the first two weeks of the war, Israel’s daily workforce is down ~16%; the percentage probably tops 20% if no-shows for work are included; construction is at a halt, people are volunteering in support of the war effort, public transportation is estimated at half-staff, lack of delivery drivers to supermarkets is creating empty shelf space, schools and universities are shuttered, etc.). Production at Check Point might affect revenue and earnings in the fourth quarter and Q1 '24.
Production numbers are sputtering to the point where the Bank of Israel, mortgage lenders, and credit card companies are taking emergency actions. Rates are frozen and there is a moratorium proposed on mortgage payments, rent, and credit card payments for soldiers and citizens affected for 3 months. This is not a bad time to invest in Check Point because, according to the Chief of the Bank of Israel,
Israel entered this war with a very solid fiscal position - a debt-to-GDP ratio just below 60% and a budget deficit of around 1.5% of GDP with similar projections for 2024. ‘Past experience has demonstrated the resilience of Israel's public finances to military conflicts,’ Yaron said, adding that in previous conflicts over the last 30 years, the government was able to absorb the cost of additional military and civilian support within responsible fiscal frameworks and ‘returning rapidly to a declining debt-to-GDP ratio on the back of strong rebounds of the domestic economy’.
SWOT Snapshot
Check Point's primary income is generated from four product categories:
Check Point scheduled its next earnings report for October 30, ’23. Over the long term, Check Point has been highly profitable with strong momentum, but does not pay a dividend. The company reported
- Q1 ’23 EPS of $1.80
- $2 per share for Q2 ‘23, and
- we estimate Q3 ’23 EPS of about $2.03 per share
- and higher for Q4 ’23
Check Point's actual earnings per share beat the estimates in 10 of the last 10 quarters. Its PE ratio is a healthy 16.89, but short interest is 6.7%. ROE is 28.7% for the trailing 12 months.
Other financial highlights from a robust 2023 second quarter are
- Total Revenues: $589M,a 3% increase Y/Y
- Product and License Revenues: $117M that was -12% Y/Y
- Security Subscription Revenues: $239M, that was +14% Y/Y
- Deferred Revenues: $1,774M, a 7% increase Y/Y
- GAAP Operating Income: $221 million, representing 38 percent of revenues
- Cash Balances, Marketable Securities and Short-Term Deposits:$3,515M as of June 30, 2023, compared to $3,676M Y/Y
- Cash Flow from operations was $191M versus $212M in Q2 ‘transactions and $30 million of tax expenses in the second quarter of 2022
- Share Repurchase Program : repurchased approximately 2.6M shares at a total cost of approximately $325M in Q2 ‘23
Another strength underpinning Check Point’s value to investors is consistent revenue growth in a high-flying industry. In 2022, reports show cyberattacks increased 38% over 2021.
Check Point’s annual revenue has sequentially been higher since 2018. We expect revenue will continue to grow, but at a slow pace. It is in line for a large-cap company. Revenue will grow along with the industry which is expected to grow at a CAGR rate of 13.83% over the next half-decade. Israel’s cybersecurity growth rate will annually increase in the same period by a CAGR of nearly 12%.
Check Point has a mere $20.7M in debt, but $1.59B in cash. The stock’s Beta shows low volatility at 0.59.
Check Point has two penchants. R&D investments in Q2 ’23 R&D expenses totaled almost $14M compared to ~$12M in Q2 ’22. Total R&D expenses ending June ’23 topped 7%, more than in the previous year. In 2022, R&D expenses were 22%, more than in FY ’21. The second is M&As . Check Point Software has made 18 acquisitions primarily in Cybersecurity, SaaS, Tel Aviv University start-ups, and others. The company spent over $1.06B to grow. Organic sales are growing annually between 3.5% and +5%.
Finally, regarding ownership, institutions own 76% of common shares, and corporate insiders own 21%. We view this matter as a positive sign for small investors. Hedge funds bought a lot of shares in the first half of FY ’22, then sold into early 2023. They have been buying shares throughout the first 6 months of ’23 including over 115K shares purchased last quarter. However, fewer funds currently own Check Point shares (29) than the number (35) that owned shares at the close of 2022.
Downsides
The primary downsides to assessing Check Point Software Technologies Ltd as a Buy opportunity are that
- 2-to-1 Wall Street analysts rate the stock a Hold
- Seeking Alpha’s Quant Rating is a Hold and leaning to the Sell-side
- Organic growth is limited and gets a poor Factor Grade, as does Valuation
Metrics suppressing the valuation are the Enterprise Value ($12.36B)-to-sales, price-to-sales, and price-to-book metrics.
Takeaway
We do not anticipate Check Point Software Technologies becoming a darling of the cybersecurity industry. Shares will hold up during the war and dip if the war expands and drags on. The share price has the potential to rise as much as 10% in the 12 months after the hot war’s potential end. One analyst forecasts the shares will reach $160 each. This is a company unlikely to experience financial distress or rapid growth, not unlike any large cap with a $15.85B market cap. Despite a couple of low SA Factor Grades, we rate Check Point Software with an A for quality and worthy of a Buy rating on any dip in the share price.
For further details see:
Check Point Software Technologies Is Hi-Quality In Hi-Tech