To: Tom Kearney who wrote (8030 ) 7/30/2001 4:00:58 PM From: Bill Harmond Read Replies (1) | Respond to Briefing on Checkpoint: Checkpoint Software (CHKP) 44.03 -0.41: On Briefing.com's Tech Stocks page, we have spent the past couple weeks trying to separate the wheat from the chaff... Basically, identifying those companies that we think will pace the recovery once the macro-economic environment improves... One such candidate is CHKP... Stock has taken a beating over the past few months (-46% from 4/19 high), due to concern over slowing sales growth... Company helped feed those concerns when it issued a revenue warning prior to its Q2 report... Warning from CHKP, along with warnings/disappointing results from Internet Security Services (ISSX), Symantec (SYMC), and RSA Security (RSAS), forced investors to rethink relative security of security stocks, as it became obvious that IT slowdown finally caught up to the industry... While the short-term outlook remains clouded by the sluggish economic environment, CHKP's long-term outlook continues to brighten... Despite the slower than (originally) expected top-line growth last quarter, CHKP managed to best consensus EPS estimate of $0.32 by one cent... It did so by aggressively managing costs... Sales and marketing expense as a percentage of total revenues fell nearly 11%, while general and administrative costs were pared by 0.7%... As a result operating margins jumped to 64.5% from 48.3% in the year-ago period... Gross margins were a gaudy 95%... Though not sustainable, margins show how effectively management guided company through difficult period... Returning to sales for a minute, even though the $142 mln reported in Q2 was below prior guidance/estimates, the figure represented a 57% year/year improvement... Given the company's leadership position in the key firewall market, and its growing dominance in the surging VPN market, Briefing.com expects CHKP to continue posting much better than market/industry growth... And even if margins do come down some, fact is bottom-line growth should be relatively robust for several years to come... At present, street predicting that CHKP will earn $1.29 in FY01 (+54%) and $1.58 in FY02 (+22%)... In light of the stock's recent pullback, CHKP trading at 33.8x and 27.6x estimated earnings... Not auto industry multiples, but when measured against projected long-term growth of 35%, corresponding PEGs (p/e to long-term growth rate) of 0.97 and 0.79 suggest the stock is relatively cheap... Throw in $866 mln in cash, no debt and a ROE of 56% and you get a stock, which in our opinion, will flex its muscles once traders grow convinced that the economy has turned... Major support is at 35, with key resistance in the 57-60 range. -- Robert Walberg, Briefing.com
