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"We've tried to keep a relatively low profile," says Shwed. For example, he points out, Check Point didn't promote its sales to dot-coms and application service providers at a time when investors were piling into companies tied to those businesses. But with the kind of financial results that Check Point has turned in recently -- especially while the much-hyped dot-com and telecommunication plays are coming up short -- the company is being pushed into the limelight. On Oct. 19, Check Point reported revenues of $116 million, an increase of 101% over the same period in 1999, and net income of $62 million, or 35 cents a share, up nearly 150% from a year earlier. "UNHEARD OF" MARGINS. Analysts had been projecting earnings per share of 26 cents. "Outstanding results exceed even most optimistic expectations," wrote Merrill Lynch analyst Mark Fernandes in a research note on Oct. 19, pointing out that it was the company's eighth consecutive quarter of accelerating year-over-year growth. David Zale, an analyst at Sands Bros., is particularly impressed with Check Point's 92% gross profit margins. "It's practically unheard of," he says. Up more than 400% the past year, the stock price hit a high of $178 a share just a few days after posting its third-quarter results, then dipped, and has held steady at around $170 a share. In contrast to the rocky Nasdaq, Check Point has maintained a fairly straight upward trajectory this year. Security stocks have been something of a haven as the tech sector has faltered this fall. No longer considered stodgy, the security companies are garnering Wall Street's attention. More analysts -- at least five since July -- are initiating coverage of Check Point, and it's likely others will follow suit. Currently, 12 out of 19 analysts rate Check Point a strong buy, and the rest call it a buy. SLIGHT DOWNGRADE. Of course, one of the downsides of all this fawning is that the stock is starting to get pricey. It's still a small company. Zale expects revenues this year of around $420 million and $620 million in 2001. Yet its market cap has mushroomed to around $25 billion. Its price-to-earnings ratio based on 2001 estimates is above 100. With such a high valuation, Zale downgraded Check Point from strong buy to buy on Oct. 19. Investors have already factored into the stock price great results going forward, he says. That leaves him seeing "not a lot of upside potential in the market at this time." "There's a danger that it will become a momentum stock," says Peter Cohan, author of Net Profit: How to Invest and Compete in the Real World of Internet Business. "Then it would become almost impossible to sustain the financial performance it takes to keep momentum investors happy." He still calls it his "favorite stock" but admits it has lost some of its appeal. SECURE GATEWAYS. But Check Point has plenty of room for growth ahead. It's not only adding more customers but it's also selling more software to existing customers. Companies need to do more than protect their networks from outside intruders, says Alan Paller, director of research at the SANS Institute, a research and education organization that trains security professionals. They're also spending money to wall off parts of their computer networks from different internal divisions, so they need "firewalls all over the place," he says. Check Point gets paid for each "gateway" that a customer adds. The company is also expanding its market by developing products for branch offices and small businesses. About 70% of Check Point's sales are used in building virtual private networks, which secure Internet communications for remote users. This is a fast-growing, relatively new market in which Check Point has the dominant share. Merrill Lynch expects the VPN market to grow from $200 million to $1.4 billion by 2004. "They aren't even close to saturating it," says Zale, who predicts the overall market for security products should reach $15 billion by 2003. Alas, there are plenty of risks. Probably the biggest one now is that some of Check Point's biggest customers will cut spending as the economy slows and the dot-com sector retrenches. But Shwed says its strongest growth, surprisingly, has come from Internet service providers and telecom companies. Rather than just adding bandwidth to improve speed and delivery, these companies are beefing up security as a way to improve service to their customers. TRUMPED BY NEW TECH? Another risk is competition, which, given Check Point's growth rates, doesn't seem to be much of a concern now. But Chris Bonavico, portfolio manager of the Transamerica Premier Aggressive Growth Fund( As for the violence between Israelis and Palestinians, that's less of a threat than one might think. Check Point's headquarters are located outside Tel Aviv, far from the fighting in the West Bank and Gaza Strip. About half of its sales are in the U.S., where it has offices in Redwood City, Calif., and an additional 30% are in Europe. Shwed says while he's hoping for peace and stability in the area, "it has zero effect on business on a daily level." The stock did dip, along with other Israeli names, in October when the fighting was heaviest. If violence worsens again, as unfortunate as that would be, it could provide an opportunity to accumulate shares, suggests Cohan, who says the October dip "would have been a good time to buy." For a strong company like Check Point, which is getting more expensive, investors might want to watch for whatever price breaks they can get. Stone is an associate editor at Business Week Online EDITED BY BETH BELTON |
