Tuesday, December 12, 2017

A current AIM International Fund Holding: Check Point Software Technologies Ltd. (CHKP) by: Tim Milani "A Good Time to Check Out"

Check Point Software Technologies Ltd. (NASDAQ: CHKP, $105.36): “A Good Time to Check out?”

By: Tim Milani, AIM Student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.


Check Point Software Technologies Ltd. (NASDAQ: CHKP) is the largest pure play security vendor globally that offers a complete security architecture of industry leading solutions to protect their customers from cyberattacks.  Their products include threat prevention, next generation firewalls, mobile security and security management.  The company is headquartered in Tel Aviv, Israel and was founded in 1993.

• Regions outside the US experienced a nice acceleration in sales growth with Europe and Asia-Pacific leading the charge with revenue up by 12% and 19.5% YoY, respectively.  CHKP derives 45% of revenue from the Americas and 37% from Europe.

• Operating margin in Q3 2017 grew 1.3% YoY with Operating expenses growing at a faster rate of 3.6% YoY but these expenses were also down by $5 million QoQ.

• The Yom Kippur holiday, occurring on the last day of the previous quarter, was projected to potentially have an impact upon $30 million in product revenue but was seemingly overestimated as CHKP was able to pull through a greater amount than expected.

• CHKP hired a new head of worldwide sales in Q2 2017 who came in with the goal to implement a set of changes including the hiring of new people to focus on channel support and it is likely these new hires have caused a weakness in sales especially in the US.

Key points: CHKP has a great track record of stable, consistent execution and performance across its nearly 25 year history with over 100,000 businesses and millions of users utilizing CHKP’s products and services worldwide.  The company has also been internationally recognized for its performance winning numerous awards including an ICSA Labs 20 year excellence award in 2015.

Several people in top management or director roles have had a long tenure at the company of near 15 or 20 years. One of these is co-founder and current CEO Gil Shwed who is also considered to be the creator of the modern firewall.  Additionally, Chairman of the board of directors and other co-founder Marius Nacht remains with CHKP.  Both own substantial portions of the outstanding shares of the company with Shwed owning 15.04% and Nacht owing 6.76% indicating they have great reason to continue to return value to shareholders.

While CHKP has historically been a great company and investment some cause for concern exists including likely slowdown of demand.  This originates from many companies being comfortable maintaining their current product offering and consequently, CHKP cited longer sales cycles among large enterprises being probable.

Finally, many analysts have recently revised their ratings down for the company upon poor Q3 2017 performance with Morgan Stanley stating that “the overall firewall market is slowing,” and that spending in the security industry is trending towards non-firewall technology.

What has the stock done lately?

CHKP recently experienced a significant drop in share price after a poor Q3 2017 earnings report that failed to beat estimates and predictions for this trend to continue into Q4 2017 as well as 2018.  Upon this news the stock on November 1, dropped nearly 15% from ~$118 to ~$103 with most analyst reports following including those from Morgan Stanley, Deutsche Bank and Barclays indicating that they think the stock is currently fairly valued near a price of $105.  Predictions for an increasingly competitive environment and slowing growth for CHKP will likely keep the stock near its current price for the foreseeable future.

Past Year Performance: CHKP has had a good run this year with a 52 week range for the stock price being between $80.78 on 12/01/2016 and $119.20 on 10/13/2017. Until recently the stock had been performing well with billing growth rates peaking at 13% YoY in Q1 2017. Subscriptions also began the year with fantastic growth up to 27% YoY in Q2 2017. YTD FCF of $4.89 is up 18% YoY and the company has plans to continue its share repurchase program with $250 Billion in Q3 and plans of an additional $1 billion in repurchases over the next year.

However, CHKP’s growth has slowed down in the most recent quarter across the majority of its segments including a deceleration of subscription revenues to a growth rate of 22% YoY suggesting that the company is having trouble renewing them.  Revenue also decreased by 6% YoY, a trend projected to increase to 8-10% in the next quarter.

Source: FactSet

My Takeaway

CHKP has been a great performer in the past and this year as even after its price drop it still has returned 23.73%.  However, as the latest trend seemingly results from worry over long term indicators as opposed to temporary inconveniences for the business regarding its growth, competitive environment and new management it is cause for further concern.  Moreover, it appears as though the company is not as committed as its competitors to investment in key areas of its business including R&D which was 15% lower than competitor Palo Alto’s contributions.

Taking all of the above into consideration these trends suggest it is likely a good time to capture the historically great return from this stock and cash out before a potential further drop in price.  Therefore it is recommended that CHKP be sold from the AIM International Equity Fund due to its weakened performance, projections and fair valuation.


Source: FactSet