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Why Check Point Software Technologies Is Overvalued

January 25, 2012 | About:

Check Point Software Technologies (NASDAQ:CHKP) has had a mixed year as it has struggled since the mid-point of last year as investors started to get a feeling that the stock is overvalued as the metrics suggest.

Check Point’s trailing 5 year valuation metrics suggest that the stock is overvalued as all of the metrics are above their respective 5 year averages. Check Point’s current P/B ratio is 3.8 and it has averaged 3.0 over the past 5 years with a high of 4.1 and low of 2.0. Check Point’s current P/S ratio is 9.4 and it has averaged 7.5 over the past 5 years with a high of 10.0 and low of 5.0. Check Point’s current P/E ratio is 23.2 and it has averaged 18.7 over the past 5 years with a high of 24.2 and low of 12.7.

The forward valuation metric has a little bit of a different conclusion. Check Point is trading at about $56 a share with analysts expecting the company to report earnings of $3.18 per share next year for a forward P/E of about 18. Revenues are expected to jump 9.9%. According to Yahoo, publically traded competitors include: Cisco (NASDAQ:CSCO), Fortinet (NASDAQ:FTNT), and Juniper Networks (NYSE:JNPR). Cisco is trading at a forward P/E of 11 with revenues expected to increase 6%. Fortinet is trading at a forward P/E of 45 and revenues are expected to jump 17%. Juniper is trading at a forward P/E multiple of 18 and revenues are expected to increase 8% next year. This suggests that Check Point is about fairly value as it is trading at the median P/E of other competitors.

Analysts don’t disagree that the stock is trading at about fair value. The consensus price target for the analysts who follow Check Point is $65. That is upside of just 15%, very neutral opinion from Street analysts.

Check Point has beat earnings estimates the past 4 quarters by a slim margin of 2 cents every time. This suggests that analysts have a pretty good idea of where Check Point’s results will be in the near future and upside surprises from earnings reports will be limited.

On January 17, the company reported strong Q4 results. Revenues came in at $356.8 million, an increase of 12%, compared to $318.5 million in the fourth quarter of 2010. Non-GAAP net income was $178.1 million, an increase of 14%, compared to $156.2 million in the fourth quarter of 2010. Non-GAAP earnings per diluted share were $0.84, an increase of 15%, compared to $0.73 in the fourth quarter of 2010.

The company was excited about the results and said that “the fourth quarter provided a great finish to an excellent year with revenues and earnings reaching all time highs, and exceeding our initial projections for the year. We experienced exceptional performance across all key business metrics: products, annuity software blades and services. We continued to expand and elevate the security of our customers with the introduction of new and innovative software blades throughout the year.”


Looking at the charts, the year can be broken up into two parts. It started out strong, rising about 30% from $45 to over $61 in July, before falling, retesting and failing to overtake the $61 level, and falling back again. The stock currently sits at around the $55 level. The 50 day moving average, which is at just above $54, is below the stock right now and may serve as support in the near future. Other levels that may act as support include the $53 level followed by $51. The 200 day moving average, which is at just below $55, may serve as resistance. The $57-58 level should be in play as a resistance level followed by $61 or the 52 week high.

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