(CHKP) Check Point Software Technologies Initiated at Neutral

We are initiating coverage on Check Point Software Technologies Ltd. (CHKP) with a Neutral recommendation and a target price of $56.00.

Tel Aviv, Israel-based Check Point was founded in 1993 and entered the information technology (IT) security market with its breakthrough product, FireWall-1. The company also offers a comprehensive range of software and combined hardware and software products aimed at IT security.

Check Point operates in different geographic regions including the Americas, Europe, Middle East and Africa, and Asia-Pacific. The company generates revenues from the sales of its network and data security products and related software updates, maintenance, support and other services.

A broad portfolio of appliances has made Check Point the market leader in network security. Enterprises face continued threats to their financial well being, brands and reputation from sophisticated cyber attacks. Consequently, cyber-security is becoming a mission-critical, high-profile requirement. Check Point’s rich experience in the security space and continuous delivery of mission-critical solutions has helped it to maintain and grow its market share.

Check Point has supplemented its growth through strategic acquisitions. The latest acquisition was Israel-based GRC (Governance, Risk Management and Compliance) solution provider Dynasec Ltd. that strengthened its 3D Security portfolio. The acquisition was completed this month.

Despite Check Point’s growth prospects, there are some major concerns that could rationalize its market share. The market for Internet security solutions is intensely competitive, with well-capitalized players such as Cisco Systems Inc. (CSCO), Juniper Networks Inc. (JNPR), Symantec Corp. (SYMC) and Microsoft Corp. (MSFT). Moreover, the entry of Sourcefire into the firewall market, which is now headed by Check Point, is another concern. Sourcefire will now give direct competition to Check Point, apart from another rival Fortinet.

Overall, we remained impressed by Check Point’s third quarter results, which beat the Zacks Consensus Estimate on the bottom line. We think that investor sentiment will be in Check Point’s favor based on its market share gains against the tech giants Cisco Systems and Juniper Networks. Check Point continues to benefit from its strength at the high end of the market, and growing demand for its blade solutions. Moreover, we are encouraged by the company’s continuous product launches. However, limited margin expansion scope (over dependence on indirect sales model), an uncertain economic environment and its European exposure are concerns.

Currently, Check Point has a Zacks #3 Rank, implying a short-term Hold recommendation.

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