Dow Jones Newswires -- May 24, 2001
Dow Jones Newswires
Analysts Check Enthusiasm For Israel's Check Point
By AMY TEIBEL
Of DOW JONES NEWSWIRES
JERUSALEM -- Major investment banks are checking their enthusiasm for Israeli network security
developer Check Point Software Technologies Ltd. (CHKP), lowering ratings, revenue estimates
and price targets as they question its ability to keep beating forecasts.
Expectations for the high-growth Nasdaq-100 company have been hurt by the slowdown in
information technology (IT) spending and increased competition from Cisco and other major
players.
"The stock is priced on high-growth potential," said Amit Yonay, analyst for ING Barings in Tel
Aviv. "And if the growth rate tapers off, obviously the stock price is affected."
Over the past few weeks, Lehman Brothers lowered its price target for the stock to $70 from $110
- upside of 15% from Wednesday's $60.55 close - and cut its rating to buy from strong buy. Merrill
Lynch pared its 2001 revenue growth estimates to 46% from the 50% the company has said it can
reach. ING Barings, seeing fair value of $75, downgraded its rating to buy from strong buy and cut
2001 revenue estimates by some $17 million to $634 million.
"There is a question in the marketplace, how closely will they make their numbers for the year," a
Tel Aviv-based analyst said, requesting anonymity.
"Longer term, we have a great company," the analyst said. "In the near term we have to be aware
that there may be some slippage. "We don't have enough visibility on how the market will turn out
for the rest of the year."
Check Point itself, while maintaining its 50% revenue growth guidance, has said it will have to act
more aggressively to achieve that target, once seen as conservative. The company didn't respond to
a request for an interview.
The Internet was only just becoming a business tool when Check Point, founded in 1993,
recognized the need to protect Internet and intranet-connected corporate networks from
unauthorized access. Since its 1996 launch on the Nasdaq, when shares traded at $6, its market
capitalization has grown to nearly $14 billion.
The company posted a net profit of $221.2 million, or $1.26 a share, diluted, in 2000, increases of
131% and 117%, respectively. Revenues rose 94% to $425.3 million. In the first quarter, Check
Point posted revenues of $145 million, some $4 million less than expected. Still, revenues and net
income were up 86% and 140% on the year, and the operating margin was 61%.
Check Point's impressive performance is working against it these days as the market holds it to very
high standards. "The market has come to expect Check Point to beat estimates by a wide margin,
which was not the case on the revenues side during 1Q 01" ING's Yonay said.
"People are trading it for reasons beyond Check Point - as a proxy for network infrastructure - so
it's become very vulnerable to sentiment changes," added the analyst who spoke on condition of
anonymity. "And the way a lot of investors are regarding it now, there is very little margin for error
on the earnings."
Lehman Brothers analyst Israel Hernandez has gone furthest in his reassessment. Hernandez
downgraded to buy from strong buy, but slashed the share price target to the consensus view of
$70 from a $110 goal cited in February when the share was trading around $90.
"The primary reason for our downgrade centers on an increasingly competitive landscape in the
VPN (virtual private network) market," the source of 70% to 75% of Check Point's current
revenue, Hernandez wrote. "Evidence is beginning to mount that while Check Point remains
well-positioned, other competitors are rapidly making inroads, particularly in the high end of the
enterprise and carrier class markets," he said, citing Cisco, Nortel and Netscreen.
Sealing the more conservative stance was Check Point's failure to win any of three major service
provider VPN deals announced this month, Hernandez said.
Goldman Sachs, in reaction to the Lehman report, agreed that the VPN market "remains
competitive given its growth prospects," but said Lehman misinterpreted recent competitor wins in
the VPN segment.
"In our view, VPN wins by Juniper at Global Crossing, by Nokia at Exodus and Cisco at
WorldCom...are not necessarily indicative of competitive wins versus Check Point since these wins
are targeting segments of the VPN market that are not necessarily related to Check Point's main
focus: enterprise information security," Goldman wrote in a research note.
Goldman reiterated its recommended list rating and advised using any weakness in Check Point
shares as a buying opportunity.
Richard Stiennon, a network security analyst for the Gartner Group consulting firm, says Check
Point is "doing great" in the VPN space against Cisco and Nortel. "From my talking with clients, I
don't see any pulling back from Check Point," Stiennon said.
The Lehman price target slash is "a little drastic considering the current market for security products,
which is very, very hot right now thanks to the Chinese," Stiennon said. "We've finally had a Pearl
Harbor in terms of security."
-By Amy Teibel, Dow Jones Newswires; 972-2-537-6985; amy.teibel@dowjones.com |
