CHKP Stock Study (7-31-24)

Posted by Mark on September 20, 2024 at 07:03 | Last modified: July 31, 2024 11:56

I recently did a stock study on Check Point Software Technologies Inc. (CHKP) with a closing price of $182.43.

M* writes:

     > Check Point Software Technologies is a pure-play cybersecurity
     > vendor. The company offers solutions for network, endpoint,
     > cloud, and mobile security in addition to security management.
     > Check Point, a software specialist, sells to enterprises,
     > businesses, and consumers. Around 50% of revenue is generated
     > in Europe, the Middle East, and Africa, 40% from the Americas,
     > and 10% from the Asia-Pacific region. The firm, based in Tel
     > Aviv, Israel, was founded in 1993 and has about 5,000 employees.

Over the past 10 years, this medium-size company has grown sales and EPS at annualized rates of 5.1% and 8.0%, respectively. Lines are up, straight, and parallel without exception. Value Line gives an Earnings Predictability score of 100. Stock price shows a similar upward march and is now trading near top of its 52-week range. Except for the latter, perhaps, visual inspection is picture-perfect.

Over the past decade, PTPM leads peer and industry averages despite [also] trending lower from 55.5% (’14) to 40.4% (’23) with a last-5-year mean of 43.8%. ROE leads peer and industry averages while increasing from 17.4% (’14) to 28.8% (’23) with a last-5-year mean of 25.0%. Debt-to-Capital is much less than peer and industry averages at zero throughout: a horizontal line. I’ve never seen such a thing (especially given the 2017 FASB GAAP change in 2017 with regard to rentals/leases) and am honestly a bit puzzled since Value Line reports annual rentals of $6.3M.

M* reports Quick Ratio of 1.2, rates the company “Standard” for Capital Allocation, and assigns a “Narrow” Economic Moat. Value Line gives an A+ grade for Financial Strength.

With regard to sales growth:

• YF projects YOY 6.1% and 5.5% for ’24 and ’25, respectively (based on 35 analysts).
• Zacks projects YOY 6.1% and 5.4% for ’24 and ’25, respectively (12 analysts).
• Value Line projects 4.4% annualized growth from ’23-’28.
• CFRA projects 6.6% YOY and 6.0% per year for ’24 and ’23-’25, respectively.
• M* reports ACE 2-year annualized growth of 5.9% while its analyst projects “midsingle digits.”.

My 4.0% forecast is below the range.

With regard to EPS growth:

• MarketWatch projects 9.7% and 11.9% for ’23-’25 and ’23-’26, respectively (based on 37 analysts).
• Nasdaq.com projects growth of 14.7% YOY and 10.4% per year for ’25 and ’24-’26 (12/12/3 analysts for ’24/’25/’26).
• Seeking Alpha projects 4-year annualized growth of 6.1%.
• Argus projects 5-year annualized growth of 5.0%.
• YF projects YOY 8.0% and 10.5% for ’24 and ’25, respectively (35), along with 5-year annualized growth of 8.3%.
• Zacks projects YOY 7.7% and 10.5% for ’24 and ’25, respectively (13), along with 5-year annualized growth of 8.2%.
• Value Line projects 7.7% annualized growth from ’23-’28.
• CFRA projects 8.6% YOY and 9.5% per year for ’24 and ’23-’25 along with a 3-year CAGR of 10.0%.
• M* projects long-term annualized growth of 8.3%.

My 5.0% forecast is at bottom of the long-term-estimate range (mean of six: 7.3%). Initial value is ’23 EPS of $7.10/share (annualized) rather than 2024 Q2 EPS of $7.24 (annualized).

My Forecast High P/E is 21.0. Over the past decade, high P/E ranges from 21.5 in ’16 to 24.7 in ’17 with a last-5-year mean of 23.2 and a last-5-year-mean average P/E of 20.3 (19.9 including 2020 low P/E). I am below the 10-year range.

My Forecast Low P/E is 16.0. Over the past decade, low P/E ranges from 16.5 in ’23 (excluding 13.4 in ’20—possibly due to COVID-19) to 18.5 in ’19 with a last-5-year mean of 17.5 (16.7 with ’20 included). I am forecasting below the range.

My Low Stock Price Forecast (LSPF) is $127.00. The default ($115.80) based on initial value given above seems unreasonably low at 36.5% less than previous close and 7.9% less than 52-week low. My (arbitrary) projection is 30.4% less and 1.0% above, respectively.

These inputs land CHKP in the SELL zone with a U/D ratio of 0.1. Total Annualized Return (TAR) is 0.8%.

PAR (using Forecast Average—not High—P/E) of -1.7% is unacceptable for any size company. If a healthy margin of safety (MOS) anchors the study, then I can proceed based on TAR instead but even that falls well short of the current yield on T-bills.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on only 32 studies (my study and six outliers excluded) over the past 90 days, averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, and Forecast Low P/E are 5.5%, 6.8%, 22.9, and 16.4, respectively. I am lower across the board. Value Line’s projected average annual P/E of 22.0 is higher than MS (19.7) and higher than mine (18.5).

MS high / low EPS are $10.15 / $7.17 versus my $9.06 / $7.24 (per share). My high EPS is less due to a lower growth rate. Value Line’s high EPS of $12.20 is greater than both.

MS LSPF of $115.20 implies Forecast Low P/E of 16.1: close to the 16.4 above. MS LSPF is 2.0% less than the default $7.17/share * 16.4 = $117.59 resulting in more conservative zoning. MS LSPF is also 9.3% less than mine.

With regard to valuation, PEG is 2.5 and 4.8 per Zacks and my projected P/E, respectively: decisively overvalued. Relative Value [(current P/E) / 5-year-mean average P/E] is quite high at 1.3.

MOS is robust because my inputs are near or below respective analyst/historical ranges. Although comparison with MS is limited due to small sample size, its 6.5% TAR is anecdotally 5.7%/year greater than mine.

Based on visual inspection and management metrics, this feels like an overvalued yet high-quality stock. While PTPM is in a clear downtrend (suggesting increasing COGS), it remains higher than a similar-trending line for peers and the industry.

I feel comfortable to say investing in such high-flying, overvalued stocks is not the BI way. Debate in the financial industry does rage on between growth or momentum and value, however. CFRA rates the company a Buy and just two weeks [albeit 17 points] ago, Value Line wrote “appreciation potential to 2027-2029 is attractive. This issue is suitable for most accounts.”

Per U/D, CHKP is a BUY under $142/share. BI TAR criterion is met < $95/share given a forecast high price ~$190.

A 90-day free trial to BetterInvesting® may be secured here (also see link under “Pages” section at top right of this page).