Why The Disappointment on Checkpoint's Earnings?

| About: Check Point (CHKP)

Check Point (Nasdaq: CHKP) has published its third quarter report and to judge by the analysts’ responses, it managed to beat the consensus estimates. “Not substantially,” said Merrill Lynch analyst Edward Maguire, “but everything depends on future developments.” Over at CIBC World Markets, they said they were pleasantly surprised with the developments, especially considering this is the third quarter which is traditionally weak. Such a surprise does not mark a significant turning point in the company’s life, they said, but rather, a business development caused by the strength of sales in the East, and strong sales of its new UTM product.

CIBC retained its “Hold” rating for Check Point, since like all the other security companies, it has not demonstrated strong growth, despite being the leader in its field. The CIBC review is, actually, fairly similar to that of Merrill Lynch, and in their closing remarks the analysts said that they believe that in times of weakness, the stock is suitable for value investors, in view of its cash assets and relatively low profit multiples.

CIBC expect Check Point to post earnings per share of $1.34 in 2006 and $1.48 in 2007. The current consensus estimate is $1.34-1.44. Goldman Sachs Group Inc. analyst Sarah Friar, said that while the company has beaten the estimates, she remained cautious as to the future. Cowen & Company LLC director and senior analyst Walter Pritchard retained his “Hold” rating for Check Point, claiming that despite the improvement, he does not see anything to make him change his mind. While he agreed that the stock is cheap, the company is currently experiencing an extremely stiff period in terms of business cycle, therefore it is correctly priced.

The analysts are apparently beginning to tire of Check Point; they don’t feel there’s enough action there. I noticed that only 26 analysts have been covering it this month compared with 36-38 in the good old days, which tells you something about some of them. One thing that all the analysts whose reviews I saw agree on is that Check Point’s third quarter showed an improvement in its business. So why all the disappointment? After all, most analysts were claiming that Check Point was on a downward slide and that it had shown an improvement in the latest quarter. So what are they disappointed about? That there’s been an improvement?

As mentioned earlier, CIBC advised value investors to seize the moment of weakness and enter the stock. So should value investors enter when the stock is cheap because it won’t do anything, or should they enter when it’s cheap because it might generate more profit in the future? Otherwise, why should a value investor bother entering at all? Because of the cash assets and multiples? The stock has had the same level of cash and multiples for two years. So why enter now? The simple question that everyone of us investors must ask is, what will the future security market look like? - will it look good, will it strengthen, or will it provide buying opportunities? If I think that the market will weaken, then it won’t provide buying opportunities. It's that simple.

I read the reports and everyone, from Gartner to the Yankee Group, believe that the information security market will continue to be strong. So to sum up about Check Point, I would put it like this: if you take the fact that the information security will continue to be a key issue in the foreseeable future, which is a quite reasonable assertion to make considering that we will continue to contend with hackers and Internet wars of all kinds, and add to that the vigor that the company has demonstrated when purchasing its shares on the free market (all the analysts are pleased that the company is doing this at long last), plus the fact that the analysts’ claim that the stock is cheap and that an improvement in Check Point’s business situation is round the corner (even if it’s small), then I find it difficult to fathom out why the analysts are so concerned.

I still hold the view that price-wise, Check Point is still the best stock in town. Could the analysts possibly be suffering from some sort of syndrome when it comes to Check Point? After all, they all pilloried the company, and it now looks like that it is emerging from the crisis that they created, and that it is not willing to be bought or sold as they wanted. Does than not say something about the analysts’ behavior?

Published originally by Globes [online], Israel business news - www.globes.co.il
© Copyright of Globes Publisher Itonut (1983) Ltd. 2006. Republished on Seeking Alpha with full permission.