Check point security stock pitch greer, scudieri (1) (1)

Check Point Software Technologies LTD (NASDAQ: CHKP) Buy

PSIA | Anthony Scudieri, Rob Greer

0

Table of Contents

I. Introduction

II. Description

III. Drivers

IV. Valuation

V. Risk Analysis

VI. Conclusion

VII. Appendix

1

I. Introduction

Introduction 2

• 12 Month Price Target: $95

• Appropriate Entry Price: ~$82

• Global Demand for Network Security1

• Strategic Positioning in Network Security2

• Opportunity in Wireless Connectivity 3

Team Recommendation: Buy

Check Point Software Technologies (NASDAQ: CHKP)

Introduction 3

II. Description

Description 4

Business Model


Check Point Software Technologies is a developer of network

security software. They have a broad portfolio of security products

that can be divided into four categories: threat prevention, mobile

security, firewalls, and management.

• Threat prevention consists of software designed to stop

viruses, malware and spyware on PCs, servers, and other

network devices

• Mobile security software is threat prevention streamlined and

designed for use on mobile devices and endpoints

• Firewalls prevent unauthorized access to a network and are

divided into enterprise and small business

• Management tools include monitoring, analysis, and policy to

ensure all software is working

Headquartered in Tel Aviv, Israel, Check Point

Software sells their products through

distributors and directly to firms online

Founder, Chairman, and CEO: Gil Shwed:

5Description

Products and

Licenses36%

Subscriptions15%

Software Updates and Maintenance

49%

Business Segments

Americas46%

Europe37%

Asia, Middle

East, Africa17%

Geographic Segments

Competitive Landscape


Description

• Fortinet, Inc. (FTNT)• Fortinet is a multinational corporation that sells high

performance network security products and services

including their flagship product, the FortiGate firewall.

Fortinet distributes its systems via more than 20,000

partners worldwide.

• FireEye, Inc. (FEYE)• FireEye is a leader in providing cyber security

solutions. They utilize a combination of technology,

intelligence, and expertise – reinforced with an incident

response team – to detect cyber attacks as they

happen, understand the risk they pose, and respond

quickly to eradicate them. FireEye is Check Point’s

principal competitor.

• Palo Alto Networks, Inc. (PANW)• Palo Alto Networks is an American network security

company that protects thousands of enterprise,

government, and service provider networks from cyber

threats. They offer threat protection, URL filtering, and

specialize in advanced firewalls designed to provide

both network security and visibility.

6

III. Drivers

Drivers 7

Global Demand for Network Security


Drivers

The need for IT security is critical as connectivity and data continue to grow across the world; Check Point Software is

there to meet that need

• The Growing Needs of Businesses

• Large businesses are starting to utilize more and more Big Data

• Big Data is a massive volume of data that requires specialized software and services to utilize

• 67% of executives have reported big data initiatives running in production, up 32% from 2013

• Healthy businesses growth in highest sales areas

• 84% of mid-sized US businesses and 65% of small US businesses preparing to expand growth

• 73% of mid-sized US businesses have a website and 40% of small US businesses do

• 38% of small US businesses plan on creating a web site within 12 months

• Eurozone business growth nearing a 46-month high based on latest purchasing managers index

• PMI up to 54.1 from 53.3 in February

• Wireless networks are seeing increasing adoption and scale where they already exist

• 89% of companies rely on wireless capabilities, up from 75% in 2011

• Wireless data traffic will continue to grow 66% a year for the next three years

• Enterprise attacks are occurring at an unprecedented rate

• 783 successful breaches in 2014, a 14% increase

• Ebay, Target, and Sony

• The Growing Needs of Governments

• Cyber-attacks and cyber-espionage biggest threats

to national security

• 61,000 attacks on the federal government

each day last year

• Last year public sector sales

accounted for 10% of Check Point’s profits

8

Strategic Positioning in Network Security


Drivers 9

Check Point Security is poised to capitalize on the growing need for IT security due to its strategic positioning within the

very broad market for data security

• Focused research & development is the key to engineering better products than its main competitors

• R&D expenditures have steadily increased to $133 million in 2014, up from $115 million in 2013

• Company reported 1,055 dedicated employees to R&D and is actively hiring 38 more

• Holds 34 patents with 19 more pending

• Constantly improving security offerings

• Introduction of ThreatCloud

• Industry’s largest real time security updater

• Implementation of Software Blade architecture

• First and only security architecture that delivers flexible and easy to manage software to

businesses of all sizes

• Security Gateway Module 260 doubles firewall and

IPS throughput to 400 Gbps and 130 Gbps and

doubles security power up to 33,00 SecurityPower

Units

• Proven track record

• Large customer base that contains all Fortune 100

companies, all Fortune 500 companies, and all

Global 500 companies

• High switching costs

• Opportunity with governmental legislature

• We believe the high attention on high-profile security could

lead to government action for cyber-security

• Sarbanes-Oxley equivalent, mandates, regulations

• Cybersecurity Information Sharing Act of 2014

Opportunity in Wireless Connectivity


Drivers

Growing demand for cloud and mobile security solutions provides new growth opportunities for the company in the coming

years

• The Rise of “The Cloud”

• Spending for cloud services expected to grow to $180 billion by 2017, a CAGR of 23% from 2013-2017

• Hackers can gain access to huge stores of info in single attack

• Check Point is key player in this domain, offering customizable security to meet company-specific needs

• Private Cloud

• Virtualization of existing Checkpoint security gateways

• Security for already virtualized company clouds

• Public Cloud

• Security for Amazon Web Services, Microsoft Azure, Rackspace OpenStack

• Acquired Hyperwise, first pre-infection eradication software (everything else = post-infection)

• The Rise of Mobile in Corporations

• 93% of employees connecting phones to company’s networks

• Need to be connected to the company’s info

• 5% of iPhones/tablet have antivirus

• 40% US bus. had security breach from mobile attacks

• Check Point = leader in mobile sec.

• Checkpoint Capsule

• Secure Viewing

• Pre/Post infection

• Document protection

• Device wipe option

10

IV. Valuation

Valuation 11

Comparable Analysis


Valuation 12

Current

Price Annual

As % of 2015E 2016E Current 2015E 2016E Growth Current 2015E 2016E Growth Dividend

52 Wk High EPS EPS LTM EBTIDA EBITDA EBITDA Rate LTM Sales Sales Sales Rate Yield

Palo Alto Networks 94.6% -91.8x -162.4x -56.5x 85.6x 44.4x #NUM! 15.9x 13.4x 10.0x (20.66%) 0.00%

Fortinet Inc. 82.3% 113.0x 81.6x 56.7x 30.3x 23.7x (35.35%) 6.0x 5.0x 4.2x (15.79%) 0.00%

FireEye 62.2% -12.3x -14.0x -16.7x -34.0x -52.6x 77.52% 15.1x 10.4x 7.5x (29.47%) 0.00%

Mean 79.7% 3.0x -31.6x -5.5x 27.3x 5.1x #NUM! 12.3x 9.6x 7.3x (21.97%) 0.00%

Median 82.3% -12.3x -14.0x -16.7x 30.3x 23.7x #NUM! 15.1x 10.4x 7.5x (20.66%) 0.00%

High 94.6% 113.0x 81.6x 56.7x 85.6x 44.4x #NUM! 15.9x 13.4x 10.0x (15.79%) 0.00%

Low 62.2% -91.8x -162.4x -56.5x -34.0x -52.6x #NUM! 6.0x 5.0x 4.2x (29.47%) 0.00%

Check Point Software 98.5% 23.08x 21.28x 19.57x 17.55x 16.28x (8.77%) 10.63x 9.81x 9.10x (7.46%) 0.0%

Price to: Enterprise Value to: Enterprise Value to:

2015E 2016E Current 2015E 2016E Margin Current 2015E 2016E Margin

EPS PEG PEG LTM EBITDA EBITDA EBITDA Growth LTM Profit Profit Profit Growth Credit

Growth Ratio Ratio Margin Margin Margin Rate Margin Margin Margin Rate Rating

Palo Alto Networks 33.4% -2.7x -4.9x -28.18% 15.61% 22.58% #NUM! -36.53% -14.39% -6.10% -59.14% N/A

Fortinet Inc. 18.0% 6.3x 4.5x 10.55% 16.41% 17.90% 30.25% 3.24% 4.67% 5.51% 30.46% N/A

FireEye 15.0% -0.8x -0.9x -90.46% -30.52% -14.28% (60.27%) -117.05% -86.25% -54.88% -31.53% N/A

Mean 22.1% 0.9x -0.4x -36.03% 0.50% 8.74% #NUM! -50.12% -31.99% -18.49% -20.07%

Median 18.0% -0.8x -0.9x -28.18% 15.61% 17.90% #NUM! -36.53% -14.39% -6.10% -31.53%

High 33.4% 6.3x 4.5x 10.55% 16.41% 22.58% #NUM! 3.24% 4.67% 5.51% 30.46%

Low 15.0% -2.7x -4.9x -90.46% -30.52% -14.28% #NUM! -117.05% -86.25% -54.88% -59.14%

Check Point Software 9.2% 2.50x 2.31x 54.31% 55.86% 55.89% 1.44% 43.75% 43.19% 43.48% -0.31% N/A

Ratio Analysis


Valuation 13

Market LTM

Value Sales Beta WACC EPS ROA ROE ROIC

Palo Alto Networks $11,630.6 $738.9 1.40 10.90% -$3.28 -21.32% -62.89% -5.86%

Fortinet Inc. $4,890.5 $770.4 1.28 10.66% $0.15 1.95% 4.02% 8.77%

FireEye $6,579.7 $425.7 1.54 11.96% -$3.13 -28.31% -38.61% -38.31%

Mean $7700.3 $645.0 1.41 11.17% -$2.09 -15.89% -32.49% -11.80%

High $11630.6 $770.4 1.54 11.96% $0.15 1.95% 4.02% 8.77%

Low $4890.5 $425.7 1.28 10.66% -$3.28 -28.31% -62.89% -38.31%

Check Point Software $16,158.9 $1,495.8 0.95 7.46% $3.43 13.41% 18.22% 22.02%

Price to: Debt to: Price to: Price to: Revenue per: FCF per:

Current Quick Book Value Equity LTM Sales FCF Share Share

Palo Alto Networks 2.1x 2.0x 3.3x 0.1x 15.7x 81.87x $8.98 $1.73

Fortinet Inc. 2.1x 1.8x 7.2x 0.0x 6.3x 34.44x $4.63 $0.97

FireEye 2.0x 1.8x 5.3x 0.0x 15.5x N/A $2.67 -$1.40

Mean 2.07x 1.86x 5.3x 0.0x 12.5x 58.16x $5.43 $0.43

High 2.11x 1.95x 7.2x 0.1x 15.7x 81.87x $8.98 $1.73

Low 2.01x 1.82x 3.3x 0.0x 6.3x 34.44x $2.67 -$1.40

Check Point Software 1.9x 1.8x 4.4x 0.0x 10.8x 21.54x $7.84 $3.85

Five-Year Summary


Valuation 14

Historical & Projected Fiscal Year

2010 2011 2012 2013 2014 2015E 2016E

Revenues $1,097.9 $1,247.0 $1,342.7 $1,394.1 $1,495.8 $1,621.3 $1,746.6

% Growth NA 13.6% 7.7% 3.8% 7.3% 8.4% 7.7%

EBITDA $594.4 $693.7 $761.4 $772.5 $812.4 $905.7 $976.2

% Margin 54.1% 55.6% 56.7% 55.4% 54.3% 55.9% 55.9%

% Growth NA 16.7% 9.8% 1.5% 5.2% 11.5% 7.8%

D&A $58.8 $51.5 $14.9 $11.6 $11.3 $22.7 $21.5

% of Sales 5.4% 4.1% 1.1% 0.8% 0.8% 1.4% 1.2%

EBIT $535.6 $642.2 $746.5 $760.9 $801.1 $883.0 $954.7

% Margin 48.8% 51.5% 55.6% 54.6% 53.6% 54.5% 54.7%

% Growth NA 19.9% 16.2% 1.9% 5.3% 10.2% 8.1%

Capex $4.9 $7.2 $8.2 $9.6 $12.7 $14.59 $19.2

% of Sales 0.4% 0.6% 0.6% 0.7% 0.8% 0.9% 1.1%

EBITDA - Capex $589.5 $686.5 $753.2 $762.9 $799.7 $891.1 $957.0

Total Debt / EBITDA n/a n/a n/a n/a n/a

EBITDA / Interest 24.36x 23.12x 21.33x 196.07x n/a

(EBITDA - Capex) / Interest 24.16x 22.88x 21.10x 193.63x n/a

Current Ratio 2.14x 2.32x 2.23x 1.62x 1.87x

Quick Ratio 1.30x 1.67x 1.56x 1.21x 1.59x

Projections


Valuation 15

Historical Year Projected Fiscal Year

2010A 2011A 2012A 2013A 2014A 2015E 2016E 2017E 2018E 2019E

Income Statement Projections

Revenue $1,097.90 $1,247.00 $1,342.70 $1,394.10 $1,495.80 $1,621.30 $1,746.60 $1,886.33 $2,044.78 $2,220.63

EBITDA 594.4 693.7 761.4 772.5 812.4 905.7 976.2 1054.5 1181.9 1299.1

EBIT 535.6 642.2 746.5 760.9 801.1 883.0 954.7 1037.5 1165.5 1283.5Growth Analysis

Revenue 13.6% 7.7% 3.8% 7.3% 8.4% 7.7% 8.0% 8.4% 8.6%

EBITDA 16.7% 9.8% 1.5% 5.2% 11.5% 7.8% 8.0% 12.1% 9.9%

EBIT 19.9% 16.2% 1.9% 5.3% 10.2% 8.1% 8.7% 12.3% 10.1%

Margin / % of Sales Analysis

EBITDA 54.1% 55.6% 56.7% 55.4% 54.3% 55.9% 55.9% 55.9% 57.8% 58.5%

EBIT 48.8% 51.5% 55.6% 54.6% 53.6% 54.5% 54.7% 55.0% 57.0% 57.8%

Depreciation & Amortization 5.4% 4.1% 1.1% 0.8% 0.8% 0.9% 1.1% 0.9% 0.8% 0.7%

Capital Expenditures 0.4% 0.6% 0.6% 0.7% 0.8% 0.9% 1.1% 1.2% 1.3% 1.3%

Net Working Capital 18.4% 41.2% 36.2% 14.7% 37.0% 35.0% 30.0% 26.0% 21.0% 20.0%

Total Revenue Growth 0.00% 13.6% 7.7% 3.8% 7.3% 8.4% 7.7% 8.00% 8.40% 8.60%

Base 8.00% 8.40% 8.60%

Bull 9.00% 9.40% 9.60%

Bear 6.80% 7.20% 7.40%

EBIT as a % of Sales 48.8% 51.5% 55.6% 54.6% 53.6% 54.5% 54.7% 55.00% 57.00% 57.80%

Base 55.00% 57.00% 57.80%

Bull 56.20% 58.20% 59.00%

Bear 53.80% 55.80% 56.60%

D&A as a % of Sales 5.4% 4.1% 1.1% 0.8% 0.8% 0.9% 1.1% 0.90% 0.80% 0.70%

Base 0.90% 0.80% 0.70%

Bull 8.00% 2.00% 1.90%

Bear -0.30% -0.40% -0.50%

CapEx as a % of Sales 0.45% 0.58% 0.61% 0.69% 0.85% 0.90% 1.10% 1.19% 1.25% 1.30%

Base 0.90% 1.10% 1.19% 1.25% 1.30%

Bull 0.40% 0.20% 0.10% 0.70% 2.00%

Bear 2.10% 2.30% 2.39% 2.45% 2.50%

NWC as a % of Sales 18.38% 41.22% 36.23% 14.70% 36.97% 35.00% 30.00% 26.00% 21.00% 20.00%

Base 35.00% 30.00% 26.00% 21.00% 20.00%

Bull 33.80% 28.80% 24.80% 19.80% 18.80%

Bear 36.20% 31.20% 27.20% 22.20% 21.20%

Discounted Cash Flow


Valuation 16

2015E 2016E 2017E 2018E 2019E

EBIT $883.0 $954.7 $1,037.5 $1,165.5 $1,283.5

Taxes @ 20.5% 181.2 195.9 212.9 239.2 263.4

EBIT (1-t) $701.8 $758.8 $824.6 $926.4 $1,020.1

Plus: Depreciation & Amortization 15.0 20.0 17.0 16.4 15.5

Less: Capital Expenditures (14.6) (19.2) (22.4) (25.6) (28.9)

Less: Change in NWC (14.5) 43.5 33.5 61.0 (14.7)

Unlevered Free Cash Flow $687.8 $803.1 $852.7 $978.2 $992.1

% Growth 139.38% 16.76% 6.18% 14.72% 1.42%

Implied DCF Intrinsic Valuation Range

A + B = C

Discounted PV of Terminal Value Using a

Cash Flows Growth Rate in Perpetuity of Enterprise Value

Discount Rate (2015 - 2019) 2.50% 2.75% 3.00% 2.50% 2.75% 3.00%

6.96% $3,497.8 $16,286.8 $17,296.1 $18,432.7 $19,784.7 $20,793.9 $21,930.6

7.21% $3,473.0 $15,243.4 $16,137.1 $17,137.0 $18,716.4 $19,610.1 $20,610.0

7.46% $3,448.5 $14,307.5 $15,103.6 $15,989.1 $17,756.0 $18,552.1 $19,437.5

7.71% $3,424.2 $13,463.6 $14,176.7 $14,965.5 $16,887.8 $17,600.9 $18,389.7

7.96% $3,400.2 $12,699.1 $13,340.9 $14,047.4 $16,099.3 $16,741.1 $17,447.6

- D = E

Total Equity Value Intrinsic Value Per Diluted Share (a)

Discount Rate Less: Net Debt 2.50% 2.75% 3.00% 2.50% 2.75% 3.00%

6.96% ($262.0) $20,046.7 $21,055.9 $22,192.6 $105.07 $110.36 $116.31

7.21% ($262.0) $18,978.4 $19,872.1 $20,872.0 $99.47 $104.15 $109.39

7.46% ($262.0) $18,018.0 $18,814.1 $19,699.5 $94.43 $98.61 $103.25

7.71% ($262.0) $17,149.8 $17,862.9 $18,651.7 $89.88 $93.62 $97.76

7.96% ($262.0) $16,361.3 $17,003.1 $17,709.6 $85.75 $89.11 $92.82

Growth Analysis and CAGRs


Valuation 17

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

2015E 2016E 2017E 2018E 2019E

Growth Analysis

Revenue

EBIT

D&A

CapEx

NWC

Palo Alto Networks Fortinet Inc. FireEye Average Company 1

Revenues 69.9% 22.3% 104.2% 65.5% 8.0%

EBITDA #NUM! 21.3% #NUM! #NUM! 8.6%

EBIT #NUM! 20.3% #NUM! #NUM! 10.1%

EBITDA - Capex #NUM! 19.6% #NUM! #NUM! 8.4%

Price Target Scenario


Valuation 18

Implied DCF Intrinsic Valuation Range Price Target Weighting

Intrinsic Value Per Diluted Share (a) $98.61 65.0%

2.25% 2.50% 2.75%

Base $98.61

6.96% $105.07 $110.36 $116.31 Bull $104.81

7.21% $99.47 $104.15 $109.39 Bear $89.20

7.46% $94.43 $98.61 $103.25 Change offset on Projections sheet and copy/paste 3 scenario targets

7.71% $89.88 $93.62 $97.76

7.96% $85.75 $89.11 $92.82

Implied DCF EV/Sales Valuation Range

Check Point Software Implied $89.52 35.0%

Equity Value per Diluted Share

$72.52 Weighted Price Target

$81.02 Base $95.43 65%

$89.52 Bull $99.46 20%

$98.01 Bear $89.31 20%

$106.51 Please include conviction level behind each price target

Implied DCF EV/EBITDA Valuation Range

Check Point Software Implied $130.97 0.0%

Equity Value Per Diluted Share

$121.48

$126.23

$130.97

$135.72

$140.47

Did not use due to two large

outliers in our competitors'

EV/EBITDA

comments

8.4x

25.3x

26.3x

27.3x

28.3x

29.3x

Average EV/EBITDA

for Peer Group

11.4x

12.4x

10.4x

Check Point Software

Median EV/Sales

for Peer Group

Discount Rate

9.4x

Bull & Bear Case


Valuation

• Bull Case

• Several more high profile network security breaches bring even more public

scrutiny to the issue

• Check Point recently introduced mobile security software experiences

widespread adoption

•Government legislature requires stronger security measures

• Bear Case

• Check Point fails to distinguish itself from its competitors in the future

• Cyber security importance diminishes in the eyes of the public and

corporations due to a decline in breaches

• Unable to generate demand for mobile security

• Our Case

• More and more businesses are compelled to further their cyber security

solutions in order to preempt a breach

• Data will continue to grow at or above the current rate in which it is being

created, causing an increasing need for data security

• Hackers continue developing sophisticated new forms of malware and

increase cyber attacks

19

Historical Valuation


Valuation 20

14

16

18

20

22

24

26

Check Point Software Technologies Ltd. (CHKP)

CHKP M22465104 2181334 NASDAQ Common stock

26-Mar-2013 to 26-Mar-2015 (Daily) Average: 19.6 High: 24.3 Low: 14.7 Latest: 23.5

Price to Earnings

4/13 7/13 10/13 1/14 4/14 7/14 10/14 1/151

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

1.9

©FactSet Research SystemsData Source: FactSet Fundamentals,

Average: 1.52 High: 1.77 Low: 1.04 Latest: 1.68

Enterprise Value to EBITDA - Relative to Israel / Technology Services -SEC

V. Risk Analysis

Risk Analysis 21

Company & Industry Risk


Risk Analysis

• Industry Risk

• Check Point competes in a very competitive industry and this is only expected

to grow in the future. They are also relatively small compared to companies like

Cisco and Microsoft that offer their own security solutions even though they may

not specialize in them. All network security companies are competing on a daily

basis against the hackers that wish to breach enterprise, government, and

individual files.

• Company Risk

• Check Point spends a lot of money researching and developing new security

solutions. If products such as their recently introduced mobile security software

fail, they will be losing out on a large and important market as well as suffering in

sales. All firms are constantly under attack and hackers might see the irony in

breaching Check Point’s databases which would lead to a large loss in

confidence. Check Point runs the risk of falling behind it’s competitors as well.

22

Benchm

ark

Ris

k

Sub-Sector

Geographic

Valuation

Market Cap

Com

pany

Specific

Valuation

Earnings

Volatility (Beta)

Acquisitions

Product Quality

Industr

y S

pecific Data Breaches

Attempts

Pipeline

Changing Technology

0 1 2 3 4 5 Notes

Market Cap 15B

Beta below 1

1 recent acquisition

Risk Analysis


Risk Analysis 23

Risk Analysis – Supply Chain


Appendix 24

VI. Conclusion

Conclusion 25

• 12 Month Price Target: $95

• Appropriate Entry Price: ~$82

• Global Demand for Network Security1

• Strategic Positioning in Network Security2

• Opportunity in Wireless Connectivity3

Team Recommendation: Buy


Introduction 26

Questions & Comments


Conclusion 27

VII. Appendix

Appendix 28

Stock Charts


Appendix

1 Year 6 Month

1 Month3 Month

29

$75

$77

$79

$81

$83

$85

$87

17-Dec 31-Dec 14-Jan 28-Jan 11-Feb 25-Feb 11-Mar

$55

$60

$65

$70

$75

$80

$85

$90

Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 $65

$67

$69

$71

$73

$75

$77

$79

$81

$83

$85

18-Sep 18-Oct 18-Nov 18-Dec 18-Jan 18-Feb 18-Mar

$79

$80

$81

$82

$83

$84

$85

$86

$87

23-Feb 2-Mar 9-Mar 16-Mar 23-Mar

Correlation & Debt Distribution


Appendix 30

Appendix Notes


Appendix

SunTrust survey of 564 businesses

Barlow Research of 680 small business

31