Check Point Software Technologies Ltd. (CHKP), Fortinet Inc (FTNT), Cisco Systems, Inc. (CSCO): Opportunities in Security Software

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With cybercrime as a growing threat in today’s world, many opportunities exist for tech firms that develop software to counter these attacks. Especially in the lucrative enterprise market, there is a growing need for digital protection. Check Point Software Technologies Ltd. (NASDAQ:CHKP) is an industry leader in enterprise network security software. With a history of solid earnings growth, the firm also has several opportunities for expansion in its core markets. With a fair valuation, the stock looks like a stable choice.

Stock basics

Check Point Software Technologies Ltd. (NASDAQ:CHKP), headquartered in Israel, offers a range of security software solutions, specializing in network security products, a business in which it has managed to acquire a dominant position. It also offers ZoneAlarm for consumers, as well as technical support services. With a market cap of $11.43 billion, it is a fairly large player in the industry. The stock is up nearly 21% in the last twelve months, and with a beta of 0.96, is more or less as volatile as its index.

Fortinet IncEarnings Growth

While past performance obviously doesn’t offer any guarantees, it does give some insight into the company’s ability to maintain growth. Check Point Software Technologies Ltd. (NASDAQ:CHKP) has done just that. Slowly but steadily, the company increased annual EPS from $1.59 in 2007 to $3.19 in 2012, beating the consensus every year. Analysts are expecting earnings to grow by 6.8% in 2013, which is around double the industry average.

For Q2 2013, the company delivered fairly upbeat results, with revenue increasing 4% year-over-year. While the operating margin dipped a bit, net income rose by 2%. More encouragingly, the company’s cash flow from operations increased a whopping 30% year-over-year to $204.7 million.

While the company’s margins appear to be dipping slightly, they are still way ahead of those of the prime competitor in the network security space, Fortinet Inc (NASDAQ:FTNT). Fortinet Inc (NASDAQ:FTNT) has a strong position in the smaller business segment, with some 70% of deals worth less than $100,000. Also, it is slightly more geographically diversified, which should allow the company to profit from growth in emerging markets.

However, Check Point Software Technologies Ltd. (NASDAQ:CHKP)’s impressive gross margin of 88% trumps Fortinet Inc (NASDAQ:FTNT)’s 72%, and the operating margin of 55% isn’t even in the same league as Fortinet Inc (NASDAQ:FTNT)’s 18%. Additionally, Fortinet Inc (NASDAQ:FTNT) recently came out with some fairly disappointing first quarter results, lowering its full-year revenue outlook by 5%. Going forward, the company expects its operating margin to dip around a percentage point in the next quarter.

Threats and Opportunities

The network security industry was recently shaken up by Cisco Systems, Inc. (NASDAQ:CSCO)’s acquisition of security software maker Sourcefire. According to commentators, the $2.7 billion deal was made in an attempt to strengthen its position in software, as its core business of networking hardware has been slowing and its security division is more or less flat.

Perhaps a first step toward a wave of consolidation in the security software market, it is clear that Check Point Software Technologies Ltd. (NASDAQ:CHKP) will face increasing competition from larger names in IT. Some have even speculated that Check Point Software Technologies Ltd. (NASDAQ:CHKP) may be a takeover target for Cisco Systems, Inc. (NASDAQ:CSCO), although it would be a considerably pricier one than Sourcefire. However, with Cisco Systems, Inc. (NASDAQ:CSCO)‘s ridiculously large balance sheet, they would easily be able to fund the transaction in cash.

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