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Have been an institutional investor 15 years working in London and Sydney. I'm very focussed on the culture of a business and management. I like businesses and people that have a track record of creating value for shareholders. My favourite books on investing (in no particular order) are... a... More
  • Shrewd Schwed - Check Point Software 0 comments
    Apr 26, 2010 6:25 PM | about stocks: CHKP
    Check Point Software was established in Tel Aviv 1993. Their founder and CEO Gil Schwed pioneered the internet firewall industry with a proprietary technology that arrived just as corporations worldwide were moving their networks from closed systems to open internet based architecture. The need for Firewall security software in-turn exploded. Between 1996 when the company went public and 2001, Check Point’s annual sales increased from just $32mln to over $500mln. Thereafter though a post-bubble overhang set in with sales stagnating over the following six years. What has impressed us about the company is the patience that management and the board showed over this relatively fallow period.
    While most companies can hardly stand the pain of a year of below-trend growth let alone five or six, management resisted all number of calls from bankers and investors to make a transformational acquisition to restart growth. With plenty of cash in the bank and all manner of activity going on around them, the temptation must have been great. These types of deals though are fraught with risk, and in most cases end up undermining the raison d’être of the acquiring company.
    Towards the end of 2008 however an opportunity did come along which was imminently sensible. Many years prior Check Point had struck a relationship with Nokia to sell their software architecture preloaded on what was known as a security appliance. Nokia had great success with this proposition at a time when they had ambitions beyond mobile phones. Under a new CEO and with ever increasing competition in the phone market Nokia ultimately decided to exit the security business. With 25,000 customers all using a Check Point Software solution, there was only one logical buyer. Check Point was able to acquire the business at a bargain basement price, giving them direct access to a customer base which might have taken a decade to build on their own. The fruits of this deal are already playing out as the company begin to upgrade and offer some of their newly launched products and engage directly with these new customers. In 2009, a tough year by any measure, Check Point grew sales and pre-tax income by 15% and generated about 10% of its market cap in free cashflow. This resumption of growth after a period of stagnation will drive significant shareholder value over the coming years. Netting off the cash on their books, we acquired Check Point shares at just 9.5x 2011 earnings, and believe the business to be worth a good 60% more than our purchase price. Management seem to agree having bought back 17% of the free float since 2005, very sensibly acquiring shares in a business they know and understand and avoiding all those annoying investment banking fees... how very shrewd!

    Disclosure: Long
    Stocks: CHKP
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