Merrill Lynch says it has found no red flags to alarm investors about Check Point (Nasdaq: CHKP), and maintained its “Neutral, Long Term Strong Buy” rating for the Internet security company.
“Check Point’s relationship with SofaWare has been a pressure point caused by confusion over the ownership structure. We took the opportunity to review the company’s 2001 20-F and consulted management for additional details,” Merrill Lynch said.
SofaWare is an affiliate of Check Point which produces the S-Box, a sub-$300 security appliance targeted at the home and home office market. Check Point is the exclusive reseller for the S-Box.
Analyst Scott Phillips said, “We believe Check Point’s $2.5 million investment in SofaWare is nominal taken in context of the over $1 billion in cash and equivalents on the balance sheet. The estimated $10 million contribution from S-Box represents just 2% of our 2002 revenue estimates for Check Point. We believe the company’s treatment of its SofaWare investment appears to be conservative.”
“From what we have seen, it does not appear Check Point is using SofaWare to drive down its costs or move those costs off balance sheet. We think the release of specifics regarding this relationship should help to allay concerns over the SofaWare relationship,” Phillips added.
Check Point also provided Merrill Lynch with details surrounding an inquiry from the European Commission. The inquiry stems from an allegation by Stonesoft Corporation, a Finnish provider of security solutions, that Check Point engaged in anti-competitive activities. The issue is under examination and the Commission has yet to formally charge the company.
“Check Point commands roughly 40% of the firewall market. We believe the Commission inquiry may not have negative implications… Previous litigation with similarly named Checkpoint Systems was also finalized in 2001. Checkpoint Systems filed a lawsuit alleging trademark infringement and unfaircompetition against Check Point Software in 1996. The District Court ruled in Check Point’s favor and the decision was upheld on appeal,” the analyst said.
Check Point shares closed on Thursday at $30.40.
Published by Israel's Business Arena on 31 March, 2002