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Cisco Systems, Inc. (CSCO), Sourcefire, Inc. (FIRE): Is Checkpoint Systems, Inc. (CKP) Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Checkpoint Systems, Inc. (NYSE:CKP) fit the bill? Let’s take a look at what its recent results tell us about its potential for future gains.

What we’re looking for

The graphs you’re about to see tell Checkpoint Systems, Inc. (NYSE:CKP)’s story, and we’ll be grading the quality of that story in several ways:

1). Growth: Are profits, margins, and free cash flow all increasing?
2). Valuation: Is share price growing in line with earnings per share?
3). Opportunities: Is return on equity increasing while debt to equity declines?
4). Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you

Now, let’s take a look at Checkpoint Systems, Inc. (NYSE:CKP)’s key statistics:

CKP Total Return Price Chart

CKP Total Return Price data by YCharts.

Criteria 3-Year* Change Grade
Revenue growth >30% (21.3%) Fail
Improving profit margin (326.2%) Fail
Free cash flow growth >Net income growth (19.4%) vs. (277.9%) Pass
Improving EPS (266.8%) Fail
Stock growth (+ 15%) <EPS growth (11.6%) vs. (266.8%) Fail

Source: YCharts.
*Period begins at end of Q2 2010.

CKP Return on Equity Chart

CKP Return on Equity data by YCharts.

Criteria 3-Year* Change Grade
Improving return on equity (347%) Fail
Declining debt to equity 20.1% Fail

Source: YCharts.
*Period begins at end of Q2 2010.

How we got here and where we’re going

Checkpoint Systems, Inc. (NYSE:CKP) musters only one out of seven possible passing grades, and even that lone pass was granted more on technicality than a genuine improvement. Nothing has moved in the right direction. Revenue is down, but net income is down to a greater degree. The only thing that’s up is the one thing that shouldn’t be: debt! In theory, things can’t possibly get much worse, but reality could be a harsh mistress. Is there any hope left for Checkpoint today?

In its second quarter results, Checkpoint Systems, Inc. (NYSE:CKP) beat analyst expectations on revenue, but missed on net income. That’s the third quarter out of its past four that Checkpoint has reported underwhelming bottom-line numbers; no wonder its net income figures have tanked recently. Checkpoint has recently agreed to sell its U.S. and Canadian CheckView business to a private-equity firm, Platinum Equity, which is likely an effort to replenish the coffers while trimming the fat — cash and equivalents have declined by a quarter in our traced period to roughly $120 million. Checkpoint is now going through extensive restructuring, and it will continue to divest non-profitable businesses like video monitors and alarm systems.

In the beginning of this year, Checkpoint appointed George Babich as permanent CEO. My Foolish colleague Rich Smith notes that Babich has been integral to Checkpoint’s strategic streamlining efforts. During his “interim” tenure, the company’s revenues have grown by 16%, while quarterly losses are half what they were before he took over. So far, Babich has obviously continued to pursue the same strategy, as evidenced by the CheckView divestiture

Cisco Systems, Inc. (NASDAQ:CSCOrecently became a major rival to Checkpoint with the purchase of Sourcefire, Inc. (NASDAQ:FIRE), which provides similar cyber-security solutions to those offered by Checkpoint. Cisco Systems, Inc. (NASDAQ:CSCO) already has some reach in cyber-security, but adding a network-security specialist to its industry-leading connectivity hardware offerings could muscle smaller players like Checkpoint out of the market. The amalgamation of Sourcefire, Inc. (NASDAQ:FIRE) and Cisco Systems, Inc. (NASDAQ:CSCO) might lead to Checkpoint right-sizing itself right out of the network-security arena, which would certainly constrain its avenues for future growth.

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