Check Point Software Technologies LTD (NASDAQ: CHKP) Buy Analysis

Check Point Software Technologies LTD (NASDAQ: CHKP) Buy
PSIA | Anthony Scudieri, Rob Greer
0

Table of Contents
I. Introduction
II. Description
III. Drivers
IV. Valuation
V. Risk Analysis
VI. Conclusion
VII. Appendix
1

I. Introduction
Introduction 2

• 12 Month Price Target: $95
• Appropriate Entry Price: ~$82
• Global Demand for Network Security1
• Strategic Positioning in Network Security2
• Opportunity in Wireless Connectivity3
Team Recommendation: Buy
Check Point Software Technologies (NASDAQ: CHKP)
Introduction 3

Business Model
Check Point Software Technologies is a developer of network
security software. They have a broad portfolio of security products
that can be divided into four categories: threat prevention, mobile
security, firewalls, and management.
• Threat prevention consists of software designed to stop
viruses, malware and spyware on PCs, servers, and other
network devices
• Mobile security software is threat prevention streamlined and
designed for use on mobile devices and endpoints
• Firewalls prevent unauthorized access to a network and are
divided into enterprise and small business
• Management tools include monitoring, analysis, and policy to
ensure all software is working
Headquartered in Tel Aviv, Israel, Check Point
Software sells their products through
distributors and directly to firms online
Founder, Chairman, and CEO: Gil Shwed:
5Description
Products
and
Licenses
36%
Subscriptions
15%
Software
Updates and
Maintenance
49%
Business Segments
Americas
46%
Europe
37%
Asia,
Middle
East,
Africa
17%
Geographic Segments

Competitive Landscape
Description
• Fortinet, Inc. (FTNT)
• Fortinet is a multinational corporation that sells high
performance network security products and services
including their flagship product, the FortiGate firewall.
Fortinet distributes its systems via more than 20,000
partners worldwide.
• FireEye, Inc. (FEYE)
• FireEye is a leader in providing cyber security
solutions. They utilize a combination of technology,
intelligence, and expertise – reinforced with an incident
response team – to detect cyber attacks as they
happen, understand the risk they pose, and respond
quickly to eradicate them. FireEye is Check Point’s
principal competitor.
• Palo Alto Networks, Inc. (PANW)
• Palo Alto Networks is an American network security
company that protects thousands of enterprise,
government, and service provider networks from cyber
threats. They offer threat protection, URL filtering, and
specialize in advanced firewalls designed to provide
both network security and visibility.
6

Global Demand for Network Security
Drivers
The need for IT security is critical as connectivity and data continue to grow across the world; Check Point Software is
there to meet that need
• The Growing Needs of Businesses
• Large businesses are starting to utilize more and more Big Data
• Big Data is a massive volume of data that requires specialized software and services to utilize
• 67% of executives have reported big data initiatives running in production, up 32% from 2013
• Healthy businesses growth in highest sales areas
• 84% of mid-sized US businesses and 65% of small US businesses preparing to expand growth
• 73% of mid-sized US businesses have a website and 40% of small US businesses do
• 38% of small US businesses plan on creating a web site within 12 months
• Eurozone business growth nearing a 46-month high based on latest purchasing managers index
• PMI up to 54.1 from 53.3 in February
• Wireless networks are seeing increasing adoption and scale where they already exist
• 89% of companies rely on wireless capabilities, up from 75% in 2011
• Wireless data traffic will continue to grow 66% a year for the next three years
• Enterprise attacks are occurring at an unprecedented rate
• 783 successful breaches in 2014, a 14% increase
• Ebay, Target, and Sony
• The Growing Needs of Governments
• Cyber-attacks and cyber-espionage biggest threats
to national security
• 61,000 attacks on the federal government
each day last year
• Last year public sector sales
accounted for 10% of Check Point’s profits
8

Strategic Positioning in Network Security
Drivers 9
Check Point Security is poised to capitalize on the growing need for IT security due to its strategic positioning within the
very broad market for data security
• Focused research & development is the key to engineering better products than its main competitors
• R&D expenditures have steadily increased to $133 million in 2014, up from $115 million in 2013
• Company reported 1,055 dedicated employees to R&D and is actively hiring 38 more
• Holds 34 patents with 19 more pending
• Constantly improving security offerings
• Introduction of ThreatCloud
• Industry’s largest real time security updater
• Implementation of Software Blade architecture
• First and only security architecture that delivers flexible and easy to manage software to
businesses of all sizes
• Security Gateway Module 260 doubles firewall and
IPS throughput to 400 Gbps and 130 Gbps and
doubles security power up to 33,00 SecurityPower
Units
• Proven track record
• Large customer base that contains all Fortune 100
companies, all Fortune 500 companies, and all
Global 500 companies
• High switching costs
• Opportunity with governmental legislature
• We believe the high attention on high-profile security could
lead to government action for cyber-security
• Sarbanes-Oxley equivalent, mandates, regulations
• Cybersecurity Information Sharing Act of 2014

Opportunity in Wireless Connectivity
Drivers
Growing demand for cloud and mobile security solutions provides new growth opportunities for the company in the coming
years
• The Rise of “The Cloud”
• Spending for cloud services expected to grow to $180 billion by 2017, a CAGR of 23% from 2013-2017
• Hackers can gain access to huge stores of info in single attack
• Check Point is key player in this domain, offering customizable security to meet company-specific needs
• Private Cloud
• Virtualization of existing Checkpoint security gateways
• Security for already virtualized company clouds
• Public Cloud
• Security for Amazon Web Services, Microsoft Azure, Rackspace OpenStack
• Acquired Hyperwise, first pre-infection eradication software (everything else = post-infection)
• The Rise of Mobile in Corporations
• 93% of employees connecting phones to company’s networks
• Need to be connected to the company’s info
• 5% of iPhones/tablet have antivirus
• 40% US bus. had security breach from mobile attacks
• Check Point = leader in mobile sec.
• Checkpoint Capsule
• Secure Viewing
• Pre/Post infection
• Document protection
• Device wipe option
10

Comparable Analysis
Valuation 12
Current
Price Annual
As %of 2015E 2016E Current 2015E 2016E Growth Current 2015E 2016E Growth Dividend
52 Wk High EPS EPS LTM EBTIDA EBITDA EBITDA Rate LTM Sales Sales Sales Rate Yield
Palo Alto Networks 94.6% -91.8x -162.4x -56.5x 85.6x 44.4x #NUM! 15.9x 13.4x 10.0x (20.66%) 0.00%
Fortinet Inc. 82.3% 113.0x 81.6x 56.7x 30.3x 23.7x (35.35%) 6.0x 5.0x 4.2x (15.79%) 0.00%
FireEye 62.2% -12.3x -14.0x -16.7x -34.0x -52.6x 77.52% 15.1x 10.4x 7.5x (29.47%) 0.00%
Mean 79.7% 3.0x -31.6x -5.5x 27.3x 5.1x #NUM! 12.3x 9.6x 7.3x (21.97%) 0.00%
Median 82.3% -12.3x -14.0x -16.7x 30.3x 23.7x #NUM! 15.1x 10.4x 7.5x (20.66%) 0.00%
High 94.6% 113.0x 81.6x 56.7x 85.6x 44.4x #NUM! 15.9x 13.4x 10.0x (15.79%) 0.00%
Low 62.2% -91.8x -162.4x -56.5x -34.0x -52.6x #NUM! 6.0x 5.0x 4.2x (29.47%) 0.00%
Check Point Software 98.5% 23.08x 21.28x 19.57x 17.55x 16.28x (8.77%) 10.63x 9.81x 9.10x (7.46%) 0.0%
Price to: Enterprise Value to: Enterprise Value to:
2015E 2016E Current 2015E 2016E Margin Current 2015E 2016E Margin
EPS PEG PEG LTM EBITDA EBITDA EBITDA Growth LTM Profit Profit Profit Growth Credit
Growth Ratio Ratio Margin Margin Margin Rate Margin Margin Margin Rate Rating
Palo Alto Networks 33.4% -2.7x -4.9x -28.18% 15.61% 22.58% #NUM! -36.53% -14.39% -6.10% -59.14% N/A
Fortinet Inc. 18.0% 6.3x 4.5x 10.55% 16.41% 17.90% 30.25% 3.24% 4.67% 5.51% 30.46% N/A
FireEye 15.0% -0.8x -0.9x -90.46% -30.52% -14.28% (60.27%) -117.05% -86.25% -54.88% -31.53% N/A
Mean 22.1% 0.9x -0.4x -36.03% 0.50% 8.74% #NUM! -50.12% -31.99% -18.49% -20.07%
Median 18.0% -0.8x -0.9x -28.18% 15.61% 17.90% #NUM! -36.53% -14.39% -6.10% -31.53%
High 33.4% 6.3x 4.5x 10.55% 16.41% 22.58% #NUM! 3.24% 4.67% 5.51% 30.46%
Low 15.0% -2.7x -4.9x -90.46% -30.52% -14.28% #NUM! -117.05% -86.25% -54.88% -59.14%
Check Point Software 9.2% 2.50x 2.31x 54.31% 55.86% 55.89% 1.44% 43.75% 43.19% 43.48% -0.31% N/A

Ratio Analysis
Valuation 13
Market LTM
Value Sales Beta WACC EPS ROA ROE ROIC
Palo Alto Networks $11,630.6 $738.9 1.40 10.90% -$3.28 -21.32% -62.89% -5.86%
Fortinet Inc. $4,890.5 $770.4 1.28 10.66% $0.15 1.95% 4.02% 8.77%
FireEye $6,579.7 $425.7 1.54 11.96% -$3.13 -28.31% -38.61% -38.31%
Mean $7700.3 $645.0 1.41 11.17% -$2.09 -15.89% -32.49% -11.80%
High $11630.6 $770.4 1.54 11.96% $0.15 1.95% 4.02% 8.77%
Low $4890.5 $425.7 1.28 10.66% -$3.28 -28.31% -62.89% -38.31%
Check Point Software $16,158.9 $1,495.8 0.95 7.46% $3.43 13.41% 18.22% 22.02%
Price to: Debt to: Price to: Price to: Revenue per: FCF per:
Current Quick Book Value Equity LTM Sales FCF Share Share
Palo Alto Networks 2.1x 2.0x 3.3x 0.1x 15.7x 81.87x $8.98 $1.73
Fortinet Inc. 2.1x 1.8x 7.2x 0.0x 6.3x 34.44x $4.63 $0.97
FireEye 2.0x 1.8x 5.3x 0.0x 15.5x N/A $2.67 -$1.40
Mean 2.07x 1.86x 5.3x 0.0x 12.5x 58.16x $5.43 $0.43
High 2.11x 1.95x 7.2x 0.1x 15.7x 81.87x $8.98 $1.73
Low 2.01x 1.82x 3.3x 0.0x 6.3x 34.44x $2.67 -$1.40
Check Point Software 1.9x 1.8x 4.4x 0.0x 10.8x 21.54x $7.84 $3.85

Five-Year Summary
Valuation 14
Historical & Projected Fiscal Year
2010 2011 2012 2013 2014 2015E 2016E
Revenues $1,097.9 $1,247.0 $1,342.7 $1,394.1 $1,495.8 $1,621.3 $1,746.6
% Growth NA 13.6% 7.7% 3.8% 7.3% 8.4% 7.7%
EBITDA $594.4 $693.7 $761.4 $772.5 $812.4 $905.7 $976.2
% Margin 54.1% 55.6% 56.7% 55.4% 54.3% 55.9% 55.9%
% Growth NA 16.7% 9.8% 1.5% 5.2% 11.5% 7.8%
D&A $58.8 $51.5 $14.9 $11.6 $11.3 $22.7 $21.5
% of Sales 5.4% 4.1% 1.1% 0.8% 0.8% 1.4% 1.2%
EBIT $535.6 $642.2 $746.5 $760.9 $801.1 $883.0 $954.7
% Margin 48.8% 51.5% 55.6% 54.6% 53.6% 54.5% 54.7%
% Growth NA 19.9% 16.2% 1.9% 5.3% 10.2% 8.1%
Capex $4.9 $7.2 $8.2 $9.6 $12.7 $14.59 $19.2
% of Sales 0.4% 0.6% 0.6% 0.7% 0.8% 0.9% 1.1%
EBITDA - Capex $589.5 $686.5 $753.2 $762.9 $799.7 $891.1 $957.0
Total Debt / EBITDA n/a n/a n/a n/a n/a
EBITDA / Interest 24.36x 23.12x 21.33x 196.07x n/a
(EBITDA - Capex) / Interest 24.16x 22.88x 21.10x 193.63x n/a
Current Ratio 2.14x 2.32x 2.23x 1.62x 1.87x
Quick Ratio 1.30x 1.67x 1.56x 1.21x 1.59x

Projections
Valuation 15
Historical Year Projected Fiscal Year
2010A 2011A 2012A 2013A 2014A 2015E 2016E 2017E 2018E 2019E
Income Statement Projections
Revenue $1,097.90 $1,247.00 $1,342.70 $1,394.10 $1,495.80 $1,621.30 $1,746.60 $1,886.33 $2,044.78 $2,220.63
EBITDA 594.4 693.7 761.4 772.5 812.4 905.7 976.2 1054.5 1181.9 1299.1
EBIT 535.6 642.2 746.5 760.9 801.1 883.0 954.7 1037.5 1165.5 1283.5
Growth Analysis
Revenue 13.6% 7.7% 3.8% 7.3% 8.4% 7.7% 8.0% 8.4% 8.6%
EBITDA 16.7% 9.8% 1.5% 5.2% 11.5% 7.8% 8.0% 12.1% 9.9%
EBIT 19.9% 16.2% 1.9% 5.3% 10.2% 8.1% 8.7% 12.3% 10.1%
Margin / % of Sales Analysis
EBITDA 54.1% 55.6% 56.7% 55.4% 54.3% 55.9% 55.9% 55.9% 57.8% 58.5%
EBIT 48.8% 51.5% 55.6% 54.6% 53.6% 54.5% 54.7% 55.0% 57.0% 57.8%
Depreciation & Amortization 5.4% 4.1% 1.1% 0.8% 0.8% 0.9% 1.1% 0.9% 0.8% 0.7%
Capital Expenditures 0.4% 0.6% 0.6% 0.7% 0.8% 0.9% 1.1% 1.2% 1.3% 1.3%
Net Working Capital 18.4% 41.2% 36.2% 14.7% 37.0% 35.0% 30.0% 26.0% 21.0% 20.0%
Total Revenue Growth 0.00% 13.6% 7.7% 3.8% 7.3% 8.4% 7.7% 8.00% 8.40% 8.60%
Base 8.00% 8.40% 8.60%
Bull 9.00% 9.40% 9.60%
Bear 6.80% 7.20% 7.40%
EBIT as a % of Sales 48.8% 51.5% 55.6% 54.6% 53.6% 54.5% 54.7% 55.00% 57.00% 57.80%
Base 55.00% 57.00% 57.80%
Bull 56.20% 58.20% 59.00%
Bear 53.80% 55.80% 56.60%
D&A as a % of Sales 5.4% 4.1% 1.1% 0.8% 0.8% 0.9% 1.1% 0.90% 0.80% 0.70%
Base 0.90% 0.80% 0.70%
Bull 8.00% 2.00% 1.90%
Bear -0.30% -0.40% -0.50%
CapEx as a % of Sales 0.45% 0.58% 0.61% 0.69% 0.85% 0.90% 1.10% 1.19% 1.25% 1.30%
Base 0.90% 1.10% 1.19% 1.25% 1.30%
Bull 0.40% 0.20% 0.10% 0.70% 2.00%
Bear 2.10% 2.30% 2.39% 2.45% 2.50%
NWC as a % of Sales 18.38% 41.22% 36.23% 14.70% 36.97% 35.00% 30.00% 26.00% 21.00% 20.00%
Base 35.00% 30.00% 26.00% 21.00% 20.00%
Bull 33.80% 28.80% 24.80% 19.80% 18.80%
Bear 36.20% 31.20% 27.20% 22.20% 21.20%

Discounted Cash Flow
Valuation 16
2015E 2016E 2017E 2018E 2019E
EBIT $883.0 $954.7 $1,037.5 $1,165.5 $1,283.5
Taxes @ 20.5% 181.2 195.9 212.9 239.2 263.4
EBIT (1-t) $701.8 $758.8 $824.6 $926.4 $1,020.1
Plus: Depreciation & Amortization 15.0 20.0 17.0 16.4 15.5
Less: Capital Expenditures (14.6) (19.2) (22.4) (25.6) (28.9)
Less: Change in NWC (14.5) 43.5 33.5 61.0 (14.7)
Unlevered Free Cash Flow $687.8 $803.1 $852.7 $978.2 $992.1
% Growth 139.38% 16.76% 6.18% 14.72% 1.42%
Implied DCF Intrinsic Valuation Range
A + B = C
Discounted PV of Terminal Value Using a
Cash Flows Growth Rate in Perpetuity of Enterprise Value
Discount Rate (2015 - 2019) 2.50% 2.75% 3.00% 2.50% 2.75% 3.00%
6.96% $3,497.8 $16,286.8 $17,296.1 $18,432.7 $19,784.7 $20,793.9 $21,930.6
7.21% $3,473.0 $15,243.4 $16,137.1 $17,137.0 $18,716.4 $19,610.1 $20,610.0
7.46% $3,448.5 $14,307.5 $15,103.6 $15,989.1 $17,756.0 $18,552.1 $19,437.5
7.71% $3,424.2 $13,463.6 $14,176.7 $14,965.5 $16,887.8 $17,600.9 $18,389.7
7.96% $3,400.2 $12,699.1 $13,340.9 $14,047.4 $16,099.3 $16,741.1 $17,447.6
- D = E
Total Equity Value Intrinsic Value Per Diluted Share (a)
Discount Rate Less: Net Debt 2.50% 2.75% 3.00% 2.50% 2.75% 3.00%
6.96% ($262.0) $20,046.7 $21,055.9 $22,192.6 $105.07 $110.36 $116.31
7.21% ($262.0) $18,978.4 $19,872.1 $20,872.0 $99.47 $104.15 $109.39
7.46% ($262.0) $18,018.0 $18,814.1 $19,699.5 $94.43 $98.61 $103.25
7.71% ($262.0) $17,149.8 $17,862.9 $18,651.7 $89.88 $93.62 $97.76
7.96% ($262.0) $16,361.3 $17,003.1 $17,709.6 $85.75 $89.11 $92.82

Growth Analysis and CAGRs
Valuation 17
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
2015E 2016E 2017E 2018E 2019E
Growth Analysis
Revenue
EBIT
D&A
CapEx
NWC
Palo Alto Networks Fortinet Inc. FireEye Average Company 1
Revenues 69.9% 22.3% 104.2% 65.5% 8.0%
EBITDA #NUM! 21.3% #NUM! #NUM! 8.6%
EBIT #NUM! 20.3% #NUM! #NUM! 10.1%
EBITDA - Capex #NUM! 19.6% #NUM! #NUM! 8.4%

Price Target Scenario
Valuation 18
Implied DCF Intrinsic Valuation Range Price Target Weighting
Intrinsic Value Per Diluted Share (a) $98.61 65.0%
2.25% 2.50% 2.75%
Base $98.61
6.96% $105.07 $110.36 $116.31 Bull $104.81
7.21% $99.47 $104.15 $109.39 Bear $89.20
7.46% $94.43 $98.61 $103.25 Change offset on Projections sheet and copy/paste 3 scenario targets
7.71% $89.88 $93.62 $97.76
7.96% $85.75 $89.11 $92.82
Implied DCF EV/Sales Valuation Range
Check Point Software Implied $89.52 35.0%
Equity Value per Diluted Share
$72.52 Weighted Price Target
$81.02 Base $95.43 65%
$89.52 Bull $99.46 20%
$98.01 Bear $89.31 20%
$106.51 Please include conviction level behind ea
Implied DCF EV/EBITDA Valuation Range
Check Point Software Implied $130.97 0.0%
Equity Value Per Diluted Share
$121.48
$126.23
$130.97
$135.72
$140.47
Did not use due to two large
outliers in our competitors'
EV/EBITDA
comments
8.4x
25.3x
26.3x
27.3x
28.3x
29.3x
Average EV/EBITDA
for Peer Group
11.4x
12.4x
10.4x
Check Point Software
Median EV/Sales
for Peer Group
Discount Rate
9.4x

Bull & Bear Case
Valuation
• Bull Case
• Several more high profile network security breaches bring even more public
scrutiny to the issue
• Check Point recently introduced mobile security software experiences
widespread adoption
•Government legislature requires stronger security measures
• Bear Case
• Check Point fails to distinguish itself from its competitors in the future
• Cyber security importance diminishes in the eyes of the public and
corporations due to a decline in breaches
• Unable to generate demand for mobile security
• Our Case
• More and more businesses are compelled to further their cyber security
solutions in order to preempt a breach
• Data will continue to grow at or above the current rate in which it is being
created, causing an increasing need for data security
• Hackers continue developing sophisticated new forms of malware and
increase cyber attacks
19

Historical Valuation
Valuation 20
14
16
18
20
22
24
26
Check Point Software Technologies Ltd. (CHKP)
CHKP M22465104 2181334 NASDAQ Common stock
26-Mar-2013 to 26-Mar-2015 (Daily) Average: 19.6 High: 24.3 Low: 14.7 Latest: 23.5
Price to Earnings
4/13 7/13 10/13 1/14 4/14 7/14 10/14 1/15
1
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1.9
©FactSet Research SystemsData Source: FactSet Fundamentals,
Average: 1.52 High: 1.77 Low: 1.04 Latest: 1.68
Enterprise Value to EBITDA - Relative to Israel / Technology Services -SEC

V. Risk Analysis
Risk Analysis 21

Company & Industry Risk
Risk Analysis
• Industry Risk
• Check Point competes in a very competitive industry and this is only expected
to grow in the future. They are also relatively small compared to companies like
Cisco and Microsoft that offer their own security solutions even though they may
not specialize in them. All network security companies are competing on a daily
basis against the hackers that wish to breach enterprise, government, and
individual files.
• Company Risk
• Check Point spends a lot of money researching and developing new security
solutions. If products such as their recently introduced mobile security software
fail, they will be losing out on a large and important market as well as suffering in
sales. All firms are constantly under attack and hackers might see the irony in
breaching Check Point’s databases which would lead to a large loss in
confidence. Check Point runs the risk of falling behind it’s competitors as well.
22

BenchmarkRisk
Sub-Sector
Geographic
Valuation
Market Cap
CompanySpecific
Valuation
Earnings
Volatility (Beta)
Acquisitions
Product Quality
IndustrySpecific
Data Breaches
Attempts
Pipeline
Changing
Technology
0 1 2 3 4 5 Notes
Market Cap 15B
Beta below 1
1 recent acquisition
Risk Analysis
Risk Analysis 23

Risk Analysis – Supply Chain
Appendix 24

• 12 Month Price Target: $95
• Appropriate Entry Price: ~$82
• Global Demand for Network Security1
• Strategic Positioning in Network Security2
• Opportunity in Wireless Connectivity3
Team Recommendation: Buy
Introduction 26

Questions & Comments
Conclusion 27

Stock Charts
Appendix
1 Year 6 Month
1 Month3 Month
29
$75
$77
$79
$81
$83
$85
$87
17-Dec 31-Dec 14-Jan 28-Jan 11-Feb 25-Feb 11-Mar
$55
$60
$65
$70
$75
$80
$85
$90
Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15
$65
$67
$69
$71
$73
$75
$77
$79
$81
$83
$85
18-Sep 18-Oct 18-Nov 18-Dec 18-Jan 18-Feb 18-Mar
$79
$80
$81
$82
$83
$84
$85
$86
$87
23-Feb 2-Mar 9-Mar 16-Mar 23-Mar

Correlation & Debt Distribution
Appendix 30

Appendix Notes
Appendix
SunTrust survey of 564 businesses
Barlow Research of 680 small business
31

Check Point Software Technologies LTD (NASDAQ: CHKP) Buy Analysis

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