Check Point's Chanuka Miracle: Rising Stock Price Brings More Buy Ratings

Check Point (CHKP) is experiencing a real Chanukah miracle: The higher the stock rises, the more analysts there are rating it “Buy.” Shouldn’t it be the other way around? The number of analysts rating Check Point “Buy” has now risen to six, compared with two last month. Basically, if we siphon off all the fanfare, we will discover that those analysts have one reason for recommending Check Point, and that is the company’s decision to go on a shopping spree. All the other components of the forecasting models remain unchanged.

Both Check Point and Teva (TEVA) are saddled with the same problem with regard to the incongruity between Wall Street and Main Street. Last Wednesday, Check Point fell after rumors claimed that the deal with the Swedish company Protect Data was not going as well as they had hoped, since less than half the shareholders had given their consent. But then Check Point raised its bid by almost 4% this past Tuesday and announced that it would be acquiring another company for $20 million, following which the investors calmed down.

I do not believe the Swedish saga is over yet. Moreover, I believe Check Point was wrong to frame the offer in the manner they did, by saying the deal would go through only with the consent of 90% of Protect Data’s shareholders. Why should they be in any rush if Check Point is upping its bid? If they can get $625 million, why not wait until the offer goes up to $650 million and perhaps even higher?

If Gil Shwed backs out of the deal because he can’t get enough support for a bid of even $625 million, Check Point’s stock will nosedive, since the analysts will claim that Check Point can’t make up its mind and Shwed is not committed to growth. Shwed is being tightfisted, they’ll claim, in addition to other derisive comments that no one likes to hear, not least talented managers. Check Point has stated that it is unlikely to raise its bid again, but it looks to me as though someone has advised the Swedes not to back down.

The Street.com columnist Priya Ganapati got to the root of the matter in the opening of her column on Tuesday. “A failed acquisition attempt, falling profit and criticisms of complacency and lost market share have finally shaken Check Point out of its slumber,” she said. Susquehanna Financial Group senior research analyst Greg Moskowitz concurred. “They have really answered the call," he wrote. “They received a lot of criticism about being too complacent about the direction and corporate strategy. Now, this speaks to a more aggressive Check Point."

If I were Shwed, I would make a new $450 million bid for Sourcefire (the U.S. security intrusion software company that Check Point tried to acquire at the beginning of the year, but was blocked by federal security agencies). That would generate at least another 25 “Buy” ratings from analysts. On the other hand, think what will happen if the Swedish deal falls through. While CIBC World Markets has rated Check Point “Buy”, Oscar Gruss analyst Ehud Eisenstein has reiterated his “Hold” rating with a target price of $20. He is one analyst who does not follow the crowd, and he is usually right. Eisenstein does see Check Point improving but prefers to wait and see how things develop.

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.