Finding Security in Security

05/19/2009 12:00 pm EST

Focus: STOCKS

Nikhil Hutheesing, editor of Forbes Wireless Stock Watch, says a security-software leader has done all the right things to survive in a tough market.

In April, Check Point Software Technologies (Nasdaq: CHKP) announced that it had purchased the security appliance business of Nokia (NYSE: NOK) for an undisclosed price. The Tel Aviv-based company, which offers security software such as firewall technologies and encryption technologies for computers, routers, and mobile devices, had worked with Nokia for more than a decade.

The acquisition of Nokia's security appliance business provides Check Point with a big, thriving business. Close to 90% of all large companies use the Nokia security platforms. [And] part of the reason that Check Point can acquire Nokia and continue its growth is because of its strong financial shape.

Last July, the company announced that there wouldn't be any layoffs this year. Instead, Check Point's chief executive officer Gil Shwed chose to reduce his salary temporarily to minimum wage. Check Point has also been hiring. It [actually] increased its Israeli workforce last year to 812—and now with the Nokia acquisition—it has grown even more.

Even in this market, companies have not been willing to compromise on security. In 2007, Check Point increased its arsenal of security products by acquiring Protect Data for $534 million to help it provide greater security for its product portfolio and to also meet the demands of its customers.

Another reason that Check Point has been able to rebuff the tough market: Its firewall and virtual private network software really are best of breed. There is competition from Cisco Systems (Nasdaq: CSCO) and Juniper Networks (Nasdaq: JNPR), but Check Point has still been gaining market share at their expense. In addition, a number of Cisco's security products have been coming to the end of their useful lives, providing Check Point with an opportunity to grab market share.

Check Point has clearly managed this tough environment very well—and that's a sign of good management. Given the company's increasing earnings, its robust platform of security products, and its increasing ability to compete more effectively, Check Point seems to be doing everything right.

Shares of Check Point are up 20% this year and have vastly outperformed the broader markets. The Standard & Poor's 500 index, for example, has only recovered to its January levels. If the market continues to recover, shares of CHKP should continue to rise.

Even now, CHKP trades at a reasonable 12x this year's projected earnings per share and it has almost a billion dollars in cash and no debt. On April 27, the company reported first-quarter revenue of $195 million—up 2% on a year-over-year basis. Operating margins came in at 55.9%, up significantly from 51.2% last year.

CHKP looks like it is on track to generate about $894 million in revenue this year—and $1 billion next year. (It closed above $23 Monday—Editor.) The 12-month target: $33.

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