Check Point, IBM: Finding Safety and Opportunity in Tech

Cash No Good...

Following the recent sales of Pfizer (PFE), Schering (SGP), and Freeport (FCX) in the Secular Trends Portfolio (the links will take you to my coverage of all 3), the cash position in the Secular Trends Model has shot up to 15%. This is far too high for an all-equity model, and I’ve been openly adamant about fleshing the model out as soon as I completed the all-important due diligence.

Also, readers will note that I prefer a concentrated portfolio of 22-23 names, and the lowest turnover possible. At Epiphany Investing we believe in getting the call right, and showing the faith via larger position sizes and longer holding periods.

Today I’m delving even further into technology, in which I see both safety and opportunity. On the safety side, Tech is where investors can find some of the balance sheets in the world. As to opportunities, our thesis is both simple and sad. Productivity enhancers for business are the most likely to see those first extra hoarded, crumpled dollars from CEOs & CFOs when the economy turns. Sadly for the American populace, those tightly-held dollars will not go into creating jobs for some time.

I am adding 100 shares to the existing IBM position, taking it up to 4.5%, and also adding Check Point Software Technologies (CHKP) to the model with a 3% weighting:

Adding 100 shares IBM at $100.46

Adding 1550 shares CHKP at $22.43.

Check Point Software a Cheap Security Play

Checkpoint is as great middleware security company with an open-architecture business in both hardware and software. They are based in Tel Aviv, which may have served to push down the multiple lower than if it were located in, say, Santa Clara.

Also, CEO / Founder Gil Shwed has stated publicly that he does not want to sell the company, which has also kept shares at a lower valuation than if they were brought up in more of the grindings of the tech rumor mill. Especially in this market, investors & top-heavy tech buyers are hawkishly searching for companies in key markets that could be ripe for takeovers. Internet-based security software is certainly at or near the top of the list. When’s the last time even a week went by without another breaking news story about a security breach, threat, or the like?

There are dozens of firms competing in this space, especially on the enterprise side. Alpha dogs like CSCO, IBM, and ORCL have their own security offerings, both proprietary and acquired. It’s a tough landscape to evaluate, and what I like about Check Point is their ability to intertwine with companies’ existing enterprise models.

I also considered investing on the consumer side of the security software space, but if you really look at the numbers over at Symantec (SYMC) and McAfee (MFE), they’re not so great. Margins are modest to weak, and those two are in the middle stages of what will be a nasty price war. No thanks.

I’ll be posting more about individual metrics and clients of Check Point, but for now I’ll throw out the boilerplate terms, which are damn hard to ignore. On already confirmed guidance of $1.85 - $1.95 for the year, CHKP trades for a run-rate P/E of less than 12x earnings. Check Point also sports 47% operating margins and zero debt. It’s an astonishingly prime takeover candidate, if only the company would change its stance on the topic. For the right price, any mind can be changed.

IBM Looks Good heading into Earnings

Goldman downgraded IBM Friday morning while upgrading tech hardware as a whole. Strange.

While I’m not out to do so, I seem to have a habit of zigging when they say to zag (see my earlier commentary on commodities, and on Caterpillar (CAT)…I guess that makes me 1 for 2 so far, if we’re keeping score)

IBM reports earnings on July 16th, and the company has already reiterated its earnings guidance for longer than any company I follow, as they expect to earn “at least” $9.20 in Fiscal 2009 and $10 - $11 per share in Fiscal 2010.

My expectation is for the company to meet or beat on the current quarter, and in this earnings season I think that will be enough to push the stock price back into the low $110s range. The broad thesis is, for me, a near no-brainer:

• They save clients money (first crumpled dollars theory)
• Their recurring revenue stream is getting higher and higher; software & services business has doubled in less than a decade, now amounts to 80% of sales
• They have loads of cash & cash flow - they can hunt down the “small to medium” size acquisitions they’ve stated are their targets
• Powerful inroads to cloud computing, security, smart grids, and electronic medical records [EMR]
• Greater overseas exposure, which will be a big plus in a falling-dollar world. Not that I’m betting on that per se, but if there was a line in Vegas, I’d take the under on the Dollar Index.

Disclosure: author does not hold a position in the companies mentioned; IBM and CHKP held in the Secular Trends Model Porftolio