Shares of Check Point Software (CHKP) are up 18% in the last quarter and 7.4% this month. Will investors get locked out of more gains? Check Point Software reports after the close on Thursday, Jan. 19.
Analysts are expecting another solid quarter. The stock had been trapped in a trading range since early 2015, but really broke out after the company reported a strong third quarter on Oct. 31.
Third-quarter earnings of $1.13 per share were $0.05 better than the consensus estimate. Revenue rose 5.9% to $427.6 million.
About 70% of shipments were for new products. Software blade sales were up 24%. Recurring subscriptions, which made up 23% of revenue, were up 370 basis points to $99 million. Operating income of $231 million was 54% of revenue, down 250 basis points due to higher spending on new products.
During the quarter, the Sandblast Zero Day Threat prevention product was the best selling and reached $20 million in billings.
Management guided fourth-quarter earnings to a range between $1.20 and $1.28. Revenue is expected to be between $460 million and $447.23 million. The consensus estimate is $1.25 for earnings and $477.9 million for revenue.
Check Point should continue to benefit from its refreshed product line. The company updated its entire firewall product line in the first quarter. Despite the product refresh, software was the fastest-growing portion of the business. Subscriptions grew 24%, while hardware grew just 1.3%.
Worldwide revenues for security-based hardware and software and services are expected to grow from $73.7 billion in 2016 to $101.6 billion by 2020, which represents a compounded annualized growth rate of 8.3%, according to data released by research firm IDC in October last year.
And that's my problem with Check Point. Despite an entire product line refresh, revenue is only forecasted to grow 6.3% this year and 5.8% next year, well under the IDC forecasted growth rate.
For some reason, whether it's intense competition or the wrong product mix, Check Point can't figure out how to grow faster than the security market. Maybe it should spin off the hardware business and focus on security software?
Consensus earnings estimates for 2016 are $4.52 and $4.89 for 2017. The average multiple for security stocks is between 17 and 19x forward estimates. Using that metric, shares of Check Point seem fairly valued.
At these levels, I'm neutral on the stock. I don't think you'll get locked out of too many future gains in this one.