Check Point: A target for acquisition?
Once-mighty Check Point Software Technologies has become an easy target for industry pundits. While new and old rivals add to their security software portfolios, Check Point has rested on its ZoneAlarm firewall laurels, announcing a series of ho-hum products while driving a leisurely 55mph on the infosecurity autobahn.
As its market prospects have come into question, Check Point's product mix, business model and go-it-alone nature have been singled out by critics as problems. Check Point tends to ignore the feedback, instead telling the naysayers that they simply don't understand.
In the past, I've offered the same type of subjective feedback about Check Point as others. Check Point either ignored me or told me I was dead wrong. With this in mind, I recently looked at Check Point's recent financials for clues to the company's outlook.
Check Point revenue growth is tepid, at best. In fiscal 2005, revenue grew approximately 12 percent over the previous year. As a comparison, Cisco Systems, the uncontested networking and network security leader, posted almost 15 percent year-over-year revenue growth.
But when it comes to profitability, Check Point has a better story to tell. Net income after taxes is a whopping 55 percent of revenue. Since Check Point is a software company, a fair comparison might be Microsoft or Oracle. It turns out that Check Point has them both beat by a mile. Microsoft comes in around 30 percent, Oracle at 25 percent.
What's more, the company is sitting on around $1.3 billion in cash and short-term investments.
How do these financial tidbits relate to the theory that Check Point is missing the market? The company's price to earnings ratio is only just over 17. This is in the same neighborhood as big IT vendors like IBM and Hewlett-Packard, and actually lower than low-margin, high-volume retailers like WalMart Stores (price-to-earnings ratio of around 18) and Target (around 20).
What this means is that investors are not willing to pay a premium for Check Point stock, in spite of the fact that it is generating so much cash. In other words, the market is penalizing Check Point for its low growth and basically ignoring the fact that the company is a cash cow.
With a market cap of around $5 billion, Check Point is an absolute steal. Granted an acquirer like HP, IBM or Symantec would alter Check Point's business model and thus lower profitability, but it would also buy a leading security brand, a loyal installed base, some of the smartest security brains in the world, and a cash-generating machine at a tremendous discount.
With all of the M&A activity this year, it is a miracle that an underperforming cash-rich company like Check Point is still out there. Check Point would be a great complement to HP or EMC. But will it happen? My guess is that with numbers like the ones it's been putting up, Check Point won't be independent much longer.