Source : Googlefinance
Investors who took positions in Check Point Software Technologies' (NASDAQ:CHKP) stock 1 year ago would have earned a return of 18.89% on their investments by April 7, 2017. During the same period, the Nasdaq earned 19.00% in capital gains. Now with Check Point's stock trading near new high, a common question for investors is whether the stock is a buy near new highs? Does Check Point's stock still have more upside left? Let's take a closer look.
The scope of this article will be to look at the earnings, valuation, street expectations and fundamentals of Check Point.
Source : Nasdaq
Check Point reported better-than-expected earnings for the consecutive straight quarter, primarily due to strong subscription sales and introduction of innovative security solutions for the cloud, mobile & advanced threat prevention. In Q4 2016, Check Point posted adjusted EPS of $1.46 and $486.7 million in revenue. The consensus estimates had called for $1.25 in adjusted EPS and revenue of $478 million. The same period of last year reportedly adjusted EPS of $1.20 and $458.07 million in revenue. Subscription sales was up by whopping 26% to $110.5 million.
Check Point reported better-than-expected earnings for consecutive quarter.
Now, does this trend continue?
Analysts are expecting Check Point to post EPS of $4.71 in FY2017. That represents a rise of 11.06% from $4.24 in FY2016. Over the next five years, the analysts are expecting Check Point earnings to grow at an average annual rate of 10.01%.
Analysts are currently expecting 2017 EPS of $4.71, which implies a 2017 forward P/E for shares of Check Point at 21.78x and 19.81x for 2018, which is about in line with the average stock in the S&P 500 index. That gives Check Point a growth adjusted PEG ratio of 2.18. In other words, despite the stock trading at 52-week high, Check Point remains poised to deliver value.
Strong Economic Moat
Source : Google Finance
Check Point's operating margin is a significant differentiator from Palo Alto (NYSE:PANW) and Fortinet (NASDAQ:FTNT) as evidenced by above charts. This shows Check Point has a better cost management system than competitors. Check Point's average operating income of 50% is also reason for impressive consecutive better-than-expected quarters.
Investors should look at valuation methodologies when deciding whether to enter or exit a stock. Valuation is driven by perceived growth, risks and investors' willingness to pay. There are various methods available to assess the valuation of a stock.
We used the DCF analysis over a five-year period, with the following assumptions:
- Revenue was projected to be in line with the street's expectations. Currently, analysts expect Check Point to generate revenue of $1,870 million in fiscal 2017 and $1,994 million in fiscal 2018. I believe Check Point will outperform the street expectation due to strong subscription sales.
- Operating margin was in line with historical levels.
- The company's fiscal 2017 tax rate was in line with historical levels.
- D&A, CapEx and changes in working capital were projected to be in line with historical levels.
- We used a baseline rate of 8.5% for WACC and a baseline terminal FCF growth rate of 3.0%.
Here's the DCF analysis down to the unlevered FCF:
The company's implied share price is $117 (WACC 8.5%, Terminal Growth 3.0%), which is a 14% premium to the current price of $103. The most likely implied value is between $102 (WACC 9%, Terminal Growth 2.5%) and $127 (WACC 8%, Terminal Growth 3.0%) per share, based on this analysis.
Market View - Positive
On April 7, 2017, Check Point's stock increased more than 18% over the last 12 months. Analysts' recommendations show a 12-month targeted price of $104 per share. Of the analysts covering Check Point, 11 recommended it as a "Strong Buy," 12 recommended it as a "Buy/Hold " and 1 recommended it as "Sell".
My Recommendation: Hold/Buy Rating
I will recommend Hold/Buy rating for Check Point based on the following factors:
- I believe Check Point will continue to report better-than-expected earnings due to stable growth and margins (strong economic moat).
- Analysts are currently expecting 2017 EPS of $4.71, which implies a 2017 forward P/E for shares of Check Point at 21.78x and 19.81x for 2018, which is about in line with the average stock in the S&P 500 index.
- Based on DCF analysis, the company's implied share price is $117, which is a 14% premium to the current price of $103. The most likely implied value is between $102 and $127 per share.
- Market view is positive.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.