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In my last article I repeated Jim Cramer’s five long-term investment themes and offered a stock pick to play the agriculture space. Another of the themes Cramer laid out on Tuesday’s Mad Money was homeland security. He recommended American Science and Engineering Inc. (ASEI), Nice Systems Ltd. (NICE), and Verint Systems (VRNT). Unfortunately, all these companies depend in some part on government contracts, which may or may not be there to support their growth going forward. In my view, cyber security is a potentially more profitable subsector, one that benefits from private sector spending in addition to public.
PC Magazine quotes a study that reports the costs associated with dealing with cyber crime went up 56% this year. “During a four-week period, organizations surveyed were hit with 72 successful cyberattacks a week, up 45 percent from the year before. Most of the attacks were in the form of distributed denial of service (DDoS), malicious code, stolen services, and Web-based attacks.” This is a serious problem and one that’s destined to become more challenging with the proliferation of mobile networks. One company on the front line is Check Point Software Technologies (CHKP), the leading provider of network security solutions. Recently the company has begun making moves into portable encryption and is my top pick in the sector.

Earnings Trend
A strong and rising earnings trend often indicates a business benefiting from a competitive durable advantage and profit-minded management.
Check Point’s Earnings per Share
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
1.25
1.00
.96
.95
1.27
1.17
1.25
1.50
1.68
2.13
After chopping around a bit until mid-decade, Check Point’s earnings have risen steadily since 2006. The 3-year average EPS growth rate is 19.4%.

Debt
Great businesses typically generate strong cash flows and require little debt financing. I like to see long-term debt less than three times current net earnings. With zero long-term debt, Check Point is in excellent financial shape.

Return on Equity
Companies that consistently deliver high returns on equity create the true wealth for shareholders. Average businesses typically offer a 12% return on equity while great businesses return over 15%.
Check Point’s Return on Equity
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
43.95
24.26
18.42
16.06
18.77
15.95
15.75
16.73
16.49
17.97
Check Point’s 10-year average ROE mirrors its current growth rate at 20%.

Retained Earnings
I want to own companies that are free to reinvest retained earnings at high rates of return. What I don’t want to see is high research and development costs or capital expenditures in the form of plant and equipment replacement. Check Point’s R&D costs are manageable at 10% of net income and capex is very light. Net margins are more than triple the industry average and year after year, free cash flow is positive and rising.
Valuation

At $53.73, Check Point sells for a P/E of 23.1, which is higher than its historical average of 18.1. Though the stock is a more compelling buy on a pullback to the low to mid $40’s, a level I expect it will reach if (when?) we retest 1100 on the S&P, the current price still offers a 6.1% free cash flow yield. While much of the tech space is priced to the clouds, Check Point’s growth is available right now at a reasonable price.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: Second Opinion On Cramer's Homeland Security Call: Consider Check Point