Check Point: Market Sell-Off, Rising Security Software Spending Create Buying Opportunity

| About: Check Point (CHKP)

Everyone is talking about safety and security this week. But, investors aren't the only one's interested in protection. High profile data breaches, including at Epsilon and Sony, are keeping enterprise IT spending focused on security software. And, as data continues to be shifted offsite, security software demand will continue higher, which is good news for Check Point Software (NASDAQ:CHKP).

Networks are getting increasingly complex and decentralized, increasing the need for real time, high-speed protection. Security and related product industry revenue will increase to $71 billion by 2014 from $55 billion today, with enterprise security spending growing 10.9% annually.

In 2010, global security spending reached 14% of client IT budgets, up from 8.2% in 2007. And, according to IDC, 31% of responding firms indicated security spending as a priority this year.

One of the fastest sectors for security spending is healthcare, where deeper integration of client information, spurred by the Hitech Act of 2009, is boosting demand for next generation data security for patient health records. In finance, banks and credit services continue to respond to consumer appetite for online and mobile solutions, further pressuring them to invest in software security. And, expanding direct-to-consumer retail sales supports security spending too as shoppers increasingly shift spending online.

All this activity boosted Check Point's Q2 revenue by 15%. Earnings per share climbed even more quickly, rising 17%. In 2010, the company's earnings per share of $2.48 was 56% higher than its 2007 pre-recession level. And, next year is expected to improve to $3.13 per share. Given the street has underestimated earnings in each of the past four quarters, its likely analysts will continue to chase earnings higher into 2012. Just this past month, Check Point upped its forecast for this year to $2.84 from $2.75, adding pressure on analysts to do just that.

Rising sales and earnings are strengthening the company's balance sheet. Check Point is sitting on $1.15 billion in cash and equivalents, some $5.56 per share with no debt. And this financial strength allows Check Point to actively buy back stock. Last quarter, it repurchased 1.38 million shares. In February, the company's board boosted its buyback authorization to $300 million for this year, a 50% increase from last year's $200 million program.

Despite all this, however, Checkpoint is trading nearly 18% off its 52 week high and has traded higher in only three of the past seventeen trading sessions. With the stock sitting on its 200 day moving average for the first time since Q3 2010, investors looking to buy solid balance sheets in growing industries should take advantage of the current sell-off to buy.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in CHKP over the next 72 hours.

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