This Network Security Company Is Definitely a Value Buy

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Are you interested in a business that has kept increasing revenue, EPS, and cash flow for the past 10 years? In addition, this business seems to be the most profitable business while employing no debt in its operations. It is Check Point Software Technologies (NASDAQ: CHKP). It ranks the second in network security, behind two technology giants: Cisco Systems (NASDAQ: CSCO) and Juniper Networks (NYSE: JNPR). Let’s dig deeper to see whether or not Check Point Software is a good investment opportunity at its current price:

One of the Top Three Network Security Players

Check Point is an Israeli-based software developer and provider of network security technologies, with its revenue coming from the sales of network and data security products. $837.4 million, or 62% of the company's total revenue, was generated from software updates, maintenance and subscriptions, while products and licenses generated around $503.5 million in revenue in 2012.

Additionally, the company is quite dependent on a small number of distributors. Around 58% of sales came from its top 10 distributors. The largest contributor represented around 18% of total revenue, while the second largest one accounted for 17% meaning two distributors account for more than 1/3 of the company's sales. According to Infonetics Research, Cisco was still the leader in the network security market, with Check Point and Juniper fighting for the second biggest position in this industry globally. 

<img src="/media/images/user_14219/ms12_sec_3q12_chart_large.jpg" />

In the past 10 years, revenue, EPS and cash flow for Check Point have kept growing consistently. Its revenue increased from $433 million in 2003, to $1.34 billion in 2012. In the same period, EPS has grown from $0.96 to $2.96. Free cash flow has seen a 10.76% compounded annualized growth rate for the past 10 years, from $288 million in 2003, to around $800 million in 2012.

The Most Profitable Company

In terms of profitability, Check Point has consistently generated double-digit ROIC that has fluctuated in the range of 15.75% to 24.26%. Over the past 12 months, the ROIC was 19.3%. Compared to Cisco and Juniper, Check Point seems to be the most efficient among the three.

<table> <tbody> <tr> <td> <p> %</p> </td> <td> <p><strong>Check Point</strong></p> </td> <td> <p><strong>Cisco</strong></p> </td> <td> <p><strong>Juniper</strong></p> </td> </tr> <tr> <td> <p><strong>Operating margin</strong></p> </td> <td> <p>54.48</p> </td> <td> <p>22.4</p> </td> <td> <p>7.1</p> </td> </tr> <tr> <td> <p><strong>Net margin</strong></p> </td> <td> <p>45.42</p> </td> <td> <p>19.72</p> </td> <td> <p>4.3</p> </td> </tr> <tr> <td> <p><strong>ROIC</strong></p> </td> <td> <p>19.33</p> </td> <td> <p>12.75</p> </td> <td> <p>1.87</p> </td> </tr> </tbody> </table>

We can clearly see that Check Point beat both Cisco and Juniper in terms of margins and return on capital. Its operating margin and net margin were two times higher than those of Cisco. In the past 12 months, Check Point generated as high as a 45.2% net margin, while Cisco’s net profit margin was only 19.72%. Check Point’s return on invested capital of 19.33% was much higher than Cisco’s ROIC of 12.75%. Juniper, with the lowest margins and return on capital, is the least profitable company among the three. Furthermore, even with the most profitable operation, Check Point didn’t use any leverage, whereas Juniper and Cisco employed some debt, with 0.1x and 0.3x in debt/equity ratio, respectively.

Valuation-wise, Cisco has the cheapest valuation compared to both Check Point and Juniper. With a total market cap of over $111 billion, Cisco is valued at only 6.1x EV/EBITDA. Juniper, a much smaller company with only $10.9 billion in total market cap, is valued the most expensive, at 17x EV/EBITDA. Check Point seems to be quite reasonably valued at 11.53x EV/EBITDA.

My Foolish Take

With a significantly high profit margin, return on capital, a conservative capital structure, and a reasonable valuation, Check Point seems to be a nice investment opportunity for long-term investors at its current trading price. 

hoangquocanh has no position in any stocks mentioned. The Motley Fool recommends Check Point Software Technologies and Cisco Systems. The Motley Fool owns shares of Check Point Software Technologies. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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