Check Point Software: Downgrading to Neutral

Another legacy software company with issues. Is this a trend? Aivars Lode avantce

Check Point Software: Downgrading to Neutral

Neutral

Following a good year of performance in 2014 we think share performance in 2015 will more likely be in line with our overall coverage and so we are downgrading to Neutral from Overweight. 

·         Shares outperformed in 2014 as growth improved and repurchases increased. CHKP stock was up 22% in 2014 as compared to only 12% for the S&P 500. The main reasons for the outperformance were that revenue growth improved on the back of better product and license growth (5.4% last quarter from 2-3% in March) and a mix shift to the faster-growing subscription blade revenue. 

·         Growth likely to stabilize in the 6-7% range. We are looking for another good year of security spending in 2015, growing more than double the forecasted increase in IT spending, and that should help keep revenue growth up for CHKP. But we do not see growth getting back to double digits in the near future. 

·         Firewall refresh at normal levels with focus on NGFW. Our communications with CSOs/CISOs (Chief Security Officers/Chief Information Security Officers) the last couple of weeks indicate about 20-25% will be focusing on a firewall refresh in 2015. That is normal in our judgment given the 4- to 5-year lifecycle of a typical firewall. 

·         Valuation not expensive, but less compelling than last year.At this time last year CHKP was trading at ~11x on 2015E EV/FCFF as compared to 13x on 2016E today. Given our outlook for 6-7% revenue growth in 2015-2016 and limited margin improvement, we feel the valuation has less room to expand. We note that with ~$3.6B of cash still on hand, management will continue to look for value-enhancing moves. In fact, we still consider this a solid large cap, liquid stock for investors looking for exposure to security. We just believe performance will more likely match that of our overall coverage over the next year. 

·         Increasing December 2015 price target to $83. This price target is based on ~14x EV/FCFF on 2016 estimates.