An analysis of last week’s trading on Wall Street clearly indicates that war with Iraq frightens investors even more than profit warnings.
Friday’s dramatic surge was practically simultaneous with the live broadcast of the UN-Iraq agreement to resume weapons inspections. During the week, the more President George W. Bush spoke out against the agreement and the more domestic political support he received for a free hand to go to war, the more the markets fell. The publication of profit warnings merely accelerated the pace.
Technical support levels were breached downwards as if they were nonexistent, especially for Nasdaq-listed shares. Nevertheless, there are still market experts who believe in an October surprise, and won’t betray its reputation as a month of dramatic turnarounds, or in technical jargon, “bear-killer”. President Bush made another aggressive speech, which won’t help matters. But I’m beginning to fantasize about how the markets would react if we were to wake up one morning to hear that Saddam Hussein was killed by one of his aides even before an attack began, as some experts claim it is possible.
As for the Israeli shares, it was Check Point’s (Nasdaq: CHKP) week, even though the show was stolen by its rival NetScreen Technologies (Nasdaq:NSCN), as usual. I don’t know if NetScreen president and CEO Robert Thomas is a good manager, but he’s a PR genius. He waited until Check Point published a sales warning (I think that Thomas was anticipating something much worse), before releasing his own press release within hours, announcing the publication date of NetScreen’s results. The announcement implied, “I make no warnings.” Simultaneously, he sent to every Israeli economic media a dramatic announcement that NetScreen was going to open a branch in Israel.
Why is Thomas a genius? Because all the economic media took the bait, publishing brazen headlines about a one-man show in Hod Hasharon will steal Check Point’s business in Israel, something along the lines of, “Somebody stop me before I finish him off.” The media also published NetScreen’s claims touting alleged failures of Check Point’s software, without citing the source.
The extroversion of NetScreen’s CEO and his media war against Check Point reminds me another cacophonous media war by two charismatic CEOs, Larry Ellison of Oracle (Nasdaq:ORCL) and Scott McNealy of Sun Microsystems (Nasdaq:SUNW) against Microsoft (Nasdaq:MSFT). What was the upshot? The quiet and modest Bill Gates ignored them, while laughing all the way to the bank with his huge profits. Meanwhile, Oracle is barely earning pennies per share while bewailing the severe economic climate. It is no longer a competitor of Microsoft, while Sun Microsystems is struggling under a flood of unceasing losses as its share has plummeted from over $60 to $2.40 in two years.
Check Point founder and CEO Gil Shwed, like Bill Gates, ignores NetScreen’s media onslaught while laughing all the way to the bank. What Thomas’ NetScreen sells in a quarter, Shwed deposits in Check Point’s big fat bank accounts – two-fold. What analysts predict NetScreen will earn in all of next year, Check Point is earning this quarter. In general, it should be grasped that if Check Point has $104 million in sales per quarter, the sales are from software installed the hardware of other companies, such as Nokia (NYSE:NOK), that have five times its sales, i.e. $500 million per quarter. These sums should be compared with NetScreen’s $35 million per quarter in sales of integrated software and hardware security systems.
Check Point will publish its results: a profit of $60 million on sales of $104 million (a net profit of 58.5%!) after trading closes on October 17. Robert Thomas, the media genius as noted above, has meanwhile postponed his results until October 29, in the hope that Check Point’s results will be forgotten by then, because Thomas will have to report a profit of $3.7 million on sales of $38 million, i.e. a net profit of less than 10%.
What about the alleged failures of Check Point’s software hinted at, not for the first time, by NetScreen? First of all, I believe that people buying Check Point products aren’t buying lemons. But the truth is that I, like others, have stood agape every quarter by Check Point’s results.
Two years ago, I asked Galileo Technologies founder Avigdor Willenz, who knows something about communications networks, what he thought. After all, such profit margins are rather rare in legitimate businesses. He told me that he had completed building Galileo’s communications network using Cisco Systems (Nasdaq:CSCO) equipment a few months previously. Cisco was and is a major customer of Galileo [now part of Marvell Technology Group (Nasdaq: MRVL)]. When he compared the security systems Cisco was offering with their equipment to Check Point’s, he found there was no comparison. He told Cisco’s agents he was sorry, but he was going with Check Point, because its systems performed much better, even if they were more expensive. Their price was worth every penny. Has anything changed in the past two years? Not if Check Point’s results are anything to go by.
So long as investors don’t see a significant deterioration in Check Point’s sales-profit ratio, they won’t buy Thomas’ tales about Check Point failures. In the meantime, the only thing going down is Check Point’s sales, and that’s by only a few percent. All knowledgeable analysts believe that’s because of the general IT market slowdown, rather than any loss of the company’s market share.
The recent dramatic profit warnings by giant IT companies like Electronic Data Systems (NYSE:EDS) and EMC Corporation's (NYSE:EMC), plus the comments by EMC CEO Joseph M. Tucci that the company would publish a severe third quarter profit warning, and the fall in demand in September was “brutal”, prove just how successful Check Point’s survival strategies have been during this severe recession.
The well-known site Morningstar.com, wrote after Check Point’s announcement that it thought the share was trading below its value. They recommended buying the share, while praising its management as “one of the best-managed companies in the software industry.” Yesterday, “Barron's” published a list of Merrill Lynch’s 20 recommended technology companies based on their expected average price/earnings-to-growth ratios (PEGs) over the next five years. Check Point and Amdocs (NYSE: DOX) made the list.
On the eve of the third quarter financial results publication season, there are still fears about profit warnings. Dual-listed NICE-Systems’ (Nasdaq: NICE) heavy turnovers on the Tel Aviv Stock Exchange follow negligible turnovers in New York. The share continues to slide, behaving as if a severe profit warning is in the offing. Last week, I wrote that I didn’t think there would be a warning, but in light of the slide I re-examined the share using my favorite methods, i.e. subcontractors, suppliers, etc. My examination showed a good quarter without a hint of weakness. Since the share is screaming otherwise, we’ll have to wait patiently, as the fall is either due to a dramatic fall in orders in the fourth quarter (which suppliers don’t yet see), or I’ll have to throw my examination methods into the trash. In any event, the share has no substantial short position in New York, nor is there any options selling activity, usually the two early signs of a profit warning.
Published by Globes [online] - www.globes.co.il - on October 8, 2002