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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. (NASDAQ:ASEI), Nice Systems Ltd. (NASDAQ:NICE), and Verint Systems (NASDAQ: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 (NASDAQ: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