The Street Likes the Look of Check Point's Acquisition of Protect Data

Analysts at investment bank CIBC World Markets have just published their round-up of third quarter company results, and have listed their preferred Israeli stocks. Their three favorites are Teva Pharmaceutical Industries Ltd. (TEVA), Elbit Systems (ESLT), and NICE Systems (NICE), followed by Check Point (CHKP). Check Point made the list because of the imminent closure of its acquisition of Swedish company Protect Data AB (PROT), the sole owner of PointSec Mobile Technologies. CIBC analysts feel this acquisition will provide Check Point with the growth it so sorely lacked.

What do CIBC analysts Avivit Mannet-Kalil and Shaul Eyal actually say in their analysis of Check Point? That after a number of relatively quiet quarters and with sales growth grinding almost to a standstill, Check Point’s announcement of its offer for Project Data will take it into fields that it never previously engaged in -- palmtop computers, laptops, and cell phones. The Swedish company operates in a market that has a growth rate of more than 30%, compared with 10% in Check Point’s own market. Looking three or four months back to the period before Check Point considered making an offer for Project Data, I find myself reflecting on the relationship between Wall Street and Main Street.

What was it that made the analysts change their opinion in this particular instance? The offer for the Swedish company. Note that this acquisition has not yet closed, but Check Point has still gained 30% since the announcement of the offer a month ago. Had we all been a bit smarter, we would have rushed out and bought Check Point shares two months ago. The stock did not fall the way it did because of problems inside the company, or because analysts were annoyed at it for not making the acquisition offer it finally came up with a month ago.

Of all those analysts who downgraded their ratings for Check Point, I didn’t notice a single one who claimed that Check Point’s situation is bad. Everyone complained that the problem with Check Point was that it either cannot or will not make an acquisition, and so they did not anticipate a revival of its growth. The development that changed Wall Street’s attitude toward Check Point from what it was several months back (six analysts now rate it “Buy” compared with two a month ago) was the offer for Project Data. “What do you want of us?” asked founder and CEO Gil Shwed and vice chairman Marius Nacht back then. “We’re looking for a company to buy, we believe in the stock and we’re buying it on the market. Our situation is great. So why all the fuss? You can be sure that we will eventually find a suitable company.”

I wrote on several occasions back then that if what you see is what you get, then Check Point is the most fairly priced stock around. This prompted a number of readers to email me telling me that I was out of touch. “Check Point is passé,” they insisted, “and so are you.” I attacked Shwed for not distributing a dividend, and for hanging on to cash that wasn’t his, and I eventually began to believe that perhaps Check Point was indeed incapable of making an acquisition.

Note that since it became public, the offer has added more than $1.1 billion to Check Point’s value without anything actually happening. This is where Wall Street differs from Main Street. Nobody noticed Check Point’s fall on Main Street, and the company continued business as usual. Over on Wall Street, however, between March 2006 and today, $1.1 billion was taken from the company's value and then returned again without any real reason. Surely the analysts didn’t think that Check Point was impervious to the concerns of its investors?

I found the answer to this anomaly in a mid-quarter update for Check Point, also from CIBC. In it, Shaul Eyal and Manish Hemrajani wrote of Check Point that it was “not a one-trick pony but a thoroughbred.” This sentence encapsulates the difference between sustained success and a one-off achievement. I won’t go into details here, but Check Point is an important example that should be used when looking at other stocks as well.

CHKP 1-year chart:

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.