Shares of Check Point Software Technologies (NAS: CHKP) hit a 52-week low on Monday. Let's take a look at how it got there and see whether cloudy skies are still in the forecast.

How it got here
Figuring out why a company has hit a 52-week low sometimes isn't as easy as it looks. In Check Point's first quarter, it reported revenue growth of 11.3% and gross margin expansion of 180 basis points, and saw a doubling of major orders. Figures like these wouldn't normally be conducive to share-price weakness.

The real reasons Check Point shareholders have remained apathetic are its guidance, which remained unchanged after the first quarter (many investors were looking for an earnings boost), and the fact that 39% of its business originates in Europe. Last I checked, Europe was dealing with a debt crisis of epic proportions, which could necessitate a spending slowdown from businesses of all sizes.


However, putting these fears aside for a moment, look at this from a logical perspective. Check Point's software provides the security backbone for information technology systems; it's not something you can simply choose to put off buying until a later date. No company, no matter how big or small, wants to deal with security threats, so Check Point's software is a near-necessity item (at least once the company gets a customer hooked). Check Point has done a marvelous job in encouraging customer upgrades and retaining existing customers, which has led to good cash flow stability.

As the Fool's Nathan Parmalee noted in June when he made Check Point a real-money buy in his Motley Fool portfolio, Check Point's upgradable options (the blades in the razor-and-blades comparison) are what keep its customers hooked and are the driving force behind Check Point's recurring revenue and high operating margins. Check Point's blades are also a reason it's been able to successfully take IT-security market share from networking giants Cisco Systems (NAS: CSCO) and Juniper Networks (NAS: JNPR) , whose built-in security isn't a one-type-fits-all for enterprise customers. This gives Check Point a more powerful value proposition in this niche area compared to its larger peers.

How it stacks up
Let's see how Check Point Software stacks up next to its peers.

CHKP Chart

CHKP data by YCharts

Smaller players like Fortinet (NAS: FTNT) and Sourcefire (NAS: FIRE) have outperformed Check Point recently, with Cisco bringing up the rear as it revamps its product line.

Company

Price/Book

Price/Cash Flow

Forward P/E

5-Year Revenue CAGR

Check Point Software 2.8 11.3 11.8 16.8%
Cisco Systems 1.7 8 8.6 8.7%
Fortinet 8.1 24 34 22.9%*
Sourcefire 6.2 48 48.9 29.8%

Sources: Morningstar, author's calculations. CAGR = compound annual growth rate. * 4-year CAGR used.

The first thing you'll notice is that the much smaller Fortinet and Sourcefire are growing pretty quickly. But considering how small they are, that's not really a surprise. What does take me by surprise is the valuations these two companies command. Sourcefire is trading within reach of 50 times forward earnings while Fortinet is valued at more than two times Check Point's cash flow and three times Cisco's.

Cisco definitely is the cheapest based on these metrics; however, it's also the only company of the four with stagnant sales growth. A product shift and European weakness have pushed back sales orders and weakened margins.

Truth be told, Check Point appears to be the best overall value since it's growing nearly as quickly as its much smaller rivals, yet boasts a valuation very similar to Cisco's.

What's next
Now for the $64,000 question: What's next for Check Point Software? That depends on whether its customers continue to upgrade to higher-margin software products and whether it can keep prying away market share from Cisco and Juniper.

Our very own CAPS community gives the company a four-star rating (out of five), with an overwhelming 94% of members who've rated it expecting it to outperform. Although I've yet to make a CAPScall on the stock thus far, I'm ready to join Nathan in the optimists camp and rate Check Point an outperform.

The selling points here continue to be Check Point's recurring revenue, its considerably cheaper valuation relative to its peers, and its market share gains on the larger built-in IT-security companies. And if that doesn't convince you, then perhaps the fact that Check Point has $1.4 billion in cash on its balance sheet with no debt will! With growing and steady cash flows, Check Point has been diligently repurchasing its own shares and theoretically could reward its shareholders with a regular dividend in the near future.

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Craving more input on Check Point Software? Start by adding it to your free and personalized watchlist. It's a free service from The Motley Fool to keep you up to date on the stocks you care about most.

At the time this article was published Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.The Motley Fool owns shares of Check Point Software Technologies and Cisco Systems. Motley Fool newsletter services have recommended buying shares of Check Point Software Technologies and Sourcefire. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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