June 17, 1998
Stocks for Dad Part I

To Dad From David
by David Forrest (TMF Bogey)

Check Point Software
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3A Jabotinsky St., Diamond Tower
Ramat Gan 52520, Israel
http://www.checkpoint.com
$25 7/8 as of June 15, 1998

Dad! Boy, have I got good news for you. Remember how mad you were when you tried to buy that baby heifer at CowsRUs.com and had your credit card info stolen? What a drag, I know. Luckily for us, there's a sweet little company named Check Point Software <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CHKPF)") else Response.Write("(Nasdaq: CHKPF)") end if %> that helps secure your connections to various Internet websites. This way, nobody will know when you're purchasing small farm animals, and they certainly won't be able to use your credit card number and wreak havoc on your credit rating.

Check Point is based in Israel, and even though I've always told you to only buy domestic companies (much easier to get information on), this company trades as ADRs (American depositary receipts) on the Nasdaq and has a great track record. Now, please keep in mind, Dad, that this IS a small company, and even though it has been kickin' butt and takin' names, there is still a great deal of risk here. As you'll see, though, I think there's a great potential for return, too.

What do they do? Check Point builds all sorts of security devices to help protect computer networks from the "bad guys" or "hackers." Its chief product is called a "firewall," and it acts as a protective layer between a company's computer network and the outside world. In a car, the firewall is the protective layer between the passengers and the engine. It protects the passengers in case of, you guessed it, a fire. Check Point's software acts in a similar manner. The firewall gives certain "permissions" to let people in and out of the network. This is crucial to ensure the privacy and protection of all the information we pass each day.

Who competes with Check Point? Well, lots of folks compete with Check Point, not the least of which is networking giant Cisco Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSCO)") else Response.Write("(Nasdaq: CSCO)") end if %>. Other competitors include companies like Ascend Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ASND)") else Response.Write("(Nasdaq: ASND)") end if %>, Cyberguard <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CYBG)") else Response.Write("(Nasdaq: CYBG)") end if %>, and many others. The amazing thing here is that despite some pretty heavy hitters in the industry, Check Point has the most widely installed firewall of anyone, over 50,000 strong. Why has it been so successful?

Performance. Check Point was and is able to offer companies a strong security product that is easy to set up, has a lot of flexibility, and isn't nearly as expensive as its competitors. These three things combined have helped propel Check Point's annual revenues from approximately $9 million to over $100 million in just three years. Oddly enough, the stock has not done as well as the company. This is where I think the opportunity exists.

Outlook. Recently Check Point has been beaten up. The stock fell from $47 3/4 a share less than three months ago to where it is now around $28 1/2. Was there bad news? Nope. Actually, the news has been very good. The company reported great first quarter earnings, beating earnings estimates by $0.09 a share. Estimates have been rising and the company has recently reaffirmed its relationship with Microsoft.

So, why has the stock not risen? Good question. I keep looking for the answer and can't find it. Based on the PEG the YPEG valuations, Check Point is worth more than $60 a share. Who knows, maybe someone knows something that we don't, but I think that the potential reward here is worth the risk you're taking.

Dad, if you do decide to buy some Check Point, or if you just want to do a bit more research, make sure to check out the Check Point message board. There are lots of knowledgeable people there who have some great insight.

Love,
David

* A Stock for dad represents the opinion of one Fool and in no way should be taken as the opinion of either the Motley Fool, Inc., the company in question or representative of anyone or anything else other than that specific Fool's thoughts.