Network security a la carte: Check Point's software blade strategy paying off

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When companies take on the task of making their corporate networks secure, they are facing, to say the least, a huge rigmarole. Hundreds, if not thousands, of employees access their corporate networks from all over the world at all hours. They come in via desktop computers, laptops and netbooks running on various operating systems. Mobile devices such as BlackBerry's and iPhones all want in to the networks, too. For the managers of these networks, making them accessible to all these devices is daunting. But making them secure is critical.

Tel Aviv-based Check Point Software Technologies (CHKP), which offers security software such as firewall technologies and encryption technologies, has the fix and is capitalizing on the problem. Under its chief executive, Gil Shwed, the company embarked on a new strategy of creating "software blades" around its security software last April. The idea: Instead of buying software from various vendors and piecing them together, corporate customers can turn to Check Point and cherry pick from a library of software blades -- say one for firewalls, another for intrusion prevention -- to get the exact security protection they need and the ability to tailor the software on the fly.

So far, it looks like the blade strategy is working well. The company got a boost in April when it acquired the security appliance business of Nokia (NOK) for an undisclosed price. The deal came with a big benefit: Close to 90 percent of all large companies already used the Nokia security platforms – which means lots of new business for Check Point.

Now, Check Point can also benefit by upselling and cross-selling many of its products to Nokia's legacy customer base -- companies that are happy to stick with a security architecture they already have rather than spend loads of cash to switch to a different system.

Europe has also been good news for Check Point. The weak market environment has not hurt Check Point sales there -- something that can't be said for competitors. Europe, which accounts for 41 percent of Check Point's revenue, has strong sales channels in Germany and the U.K. and says that sales remain strong in those markets.

The upshot of all this is that shares of Check Point are up nearly 60 percent year-to-date to $29.74 and have vastly outperformed the broader markets. The Standard & Poor's 500 index, for example, is up 20 percent over the same period. But even now, the stock trades at a reasonable 15.9 times this year's projected earnings per share compared to 17.6 times for Cisco (CSCO) and 27.9 times for Juniper (JNPR). It also has an attractive price-earnings to growth ratio (PEG) of 1.2 -- beating Cisco's and Juniper's PEG of 1.84. Plus, Check Point has a strong balance sheet with no debt and the most cash in its history -- more than $1 billion.

Check Point generated earnings of $100.9 million on revenue of $223.6 million in the quarter ending in June. This month, Oppenheimer's Shaul Eyal raised his earnings estimates for the company up by a penny to 49 cents per share, taking its expected earnings per share estimate for fiscal 2009 to $1.98 per share -- up from 1.78 in fiscal 2008. Looking forward to 2010, Eyal says earnings should come at $2.23 per share on revenue of over $1 billion. Over a three- to five-year time span, Check Point's earnings per share should grow by 20 percent.

And one more great thing: Check Point has been buying back its own shares -- always a good sign for investors. Last quarter, it bought back $50 million worth of shares and it still has $131 million remaining in its buyback program.

Given its strong fundamentals, its ability to glide through the tough economy and its seemingly excellent prospects ahead, shares of Check Point should do very well in the year ahead. If you conservatively value the company at 18 times fiscal-year 2010 earnings estimates (about Cisco's P/E), you get a 12-month target price of $40 per share -- an increase of 34 percent from current levels. And that doesn't even take into account any premium for the company's mountain of cash.

Check Point will release its third quarter earnings results on October 22, 2009.

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