CHKP

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CHKP

  1. 1. CHECK POINT SOFTWARE (CHKP)TRADEBuyer below $55 (<18x 2012E EPS gross, 12.5x net of $15 CPS)TRADE:Mismatched reward/risk profile. Downside to the mid $40s would be 8x net PE, lowest ever. Upside to return >$70range 20/30 split. Free option on multiple expansion with PA Networks IPO.Event turbulence. Weak trade post Q1, met expectations, no change in guidance.Churn in theses. Carried higher PE in 2011 as “growthier” story, concerns post Q1, growth premium fell. Concernsover exposure in EMEA.CLOSE: $53.78YTD Return: 2.36% (performed inline with sec software SYMC, FTNT, WBSN avg -5%)
  2. 2. S&P Return: 4.55%52 wk hi/lo: $47.79 – 65.00 (12.53% - 20.86%)Key trading event: Q1 Earnings, Q2 Guidance missed whisper; reset expectations.Key trading cycle: 2H mkt outperformance (>20% 2009, >35% 2010) triggered by reset expectations post Q1Earnings; 100%, 2 out of 3 years. 2011 did not reset expectations. 160.00 140.00 2009-1H 2010-1H 2011-1H 120.00 2012-1H 2009-2H 2010-2H 2011-2H 100.00 80.00 100 103 106 109 112 115 118 121 124 127 130 1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 61 64 67 70 73 76 79 82 85 88 91 94 97COMPANYCHKP is the largest pureplay network security provider. Their primary product is UTM – unified threat managementappliance, which combines firewalls, intrusion prevention (black list/white list), gateway AV, anti-spam, VPN, webfiltering, etc.Product historically was HW appliance but is moving to more software based model. OM’s continue to be some ofif not the highest in the tech space at around 58-60%.MARKETNet sec is one of the fastest growing markets in networking and security, benefitting from the consolidation trendof relatively commodity solutions. Key benefit is the simplicity and cost savings to manage network security policywith a single vendor/solution. CHKP is the leader in the UTM consolidation space, with CSCO and JNPR on network
  3. 3. feature side, and WBSN, SNWL (now acquired) and SYMC on sec side. FTNT is the closest comp pureplay comp butfocuses on the smaller and lower end of the market.Net sec is seeing next generational changes with PA Networks (application and identity based firewalls). Could seesome market premiums expansion leading into and after IPO.THEMES 1) EMEA risk: 40% of revenue 2) Rev growth deceleration: some biz model change toward SW, some renewal headwinds; and loss of growth premiumVALUATION 1) Stock declined from $64.05 to $50.46 following earnings, down 22%. Company maintained guidance for the year, set in January. Sets up pattern seen in 2009 and 2010. 2) Gross PE fell from 20x to 16x, more inline with historical PE levels in 2008 (15x) and 2009 (17x); good entry point. Carried forward under 20% growth, stock is worth $60 at YE at 16x PE. 3) Net PE is currently at 12x, and traded at 10x at $50. Limited downside at this levels. 4) Optionality to sustain 20x PE with CPS at $15-18 by year end. 5) Cash available to acquire growth; but has been limited historically due to strategic issues around foreign ownership. 6) Most analyst price targets are net cash, 15x EPS; inline with larger comparables including SYMC. PTs at $65-70. 7) Following historical 2H performance net of S&P returns of 25%, yield a PT of $67. 8) CHKP is typically a low-vol stock, and tends to outperform bear markets. 9) CHKP is not “cheap” relative to other traditional IT stocks, but it is normal relative to historical Sec levels, and cheaper than comps FTNT.PE/EPS
  4. 4. PE EPSQ1-12 24.00 Q1-12 0.68Q4-11 20.60 Q4-11 0.75 2.55Q3-11 21.62 Q3-11 0.63Q2-11 24.19 Q2-11 0.60Q1-11 22.89 Q1-11 0.57Q4-10 21.71 Q4-10 0.64 2.12Q3-10 18.56 Q3-10 0.54Q2-10 15.68 Q2-10 0.48Q1-10 19.93 Q1-10 0.46Q4-09 20.17 Q4-09 0.51 1.68Q3-09 17.94 Q3-09 0.43Q2-09 15.44 Q2-09 0.36Q1-09 14.61 Q1-09 0.38Q4-08 12.66 Q4-08 0.41 1.5Q3-08 15.36 Q3-08 0.37Q2-08 16.32 Q2-08 0.36Q1-08 16.00 Q1-08 0.36Q4-07 17.57 Q4-07 0.39Q3-07 20.81 Q3-07 0.34Q2-07 19.33 Q2-07 0.31

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