Checkpoint's Investor Confidence Is Weakening

One thing is clear to every first-year economics student, and that is that Check Point Software Technologies Ltd. (CHKP) is in a fantastic situation. But it’s also clear that something is holding the company back.

I’ve had a long argument with some analysts about Check Point, whether the long slide in its share and stagnation, despite improved quarterly results, correctly reflect dismal conditions at the company, or whether it has created a buy opportunity.

I’ll take this opportunity to talk about company managers, boards of directors and the relationships with shareholders and investors. James Cramer, no great fan of Check Point, says, “I’ve been following the competing security company McAfee (MFE) for a long time, and the results are in. McAfee beat a 52-week peak.” There is no doubt that people owning McAfee shares have benefited much more than people owning Check Point shares.

I ask, if everything that Check Point publishes is favorable, why does the share behave as it does? Do investors see something I don’t? I have no idea, but early this week, Globes published a letter by IT-Harvest analyst Richard Stiennon to Check Point founder and CEO Gil Shwed. The letter originally appeared in Network World, the leading U.S. trade journal on networking and information security.

Stiennon wrote, “Dear Gil, This letter is meant to be a wake up call. While it points to many missed opportunities and wrong turns that I believe Check Point Software has made I hope you will understand that it is a call to action rather than a criticism of past blunders.

”I have been perplexed by Check Point’s actions, or rather lack of actions, for the last seven years. Do you not see that there are opportunities in network security that surpass the existing size of the market? Do you not understand that your current customers are less well protected from outside threats than they were when they first became your customers? Do you not see the warning signs when you lose your major accounts to competitors? Do you not watch the network security start up activity in Silicon Valley? Have you not noticed that Cisco is pulling off a marketing coup with its mis-begotten Network Admission Control scheme?”

This letter brings me to the subject of management-shareholder relations. Shwed is unquestionably one of Israel’s best entrepreneurs and managers. He took a technology idea, applied it, and then became the leader in the emerging sector on Main Street. Few people can do this, and he did it in a way that can hardly be compared. He is definitely a member of the same cadre as Comverse Technology Inc. (CMVT) founder Kobi Alexander, the Zisapel brothers, and Retalix Ltd. (RTLX) president and CEO Barry Shaked, men who turned ideas into successful products on Main Street.

But what about Wall Street? Wall Street and Main Street live in an odd love-hate/jealousy-comity symbiosis. The moment a company joins Wall Street in order to realize its plans, other people’s money and shareholders take over from the entrepreneur. The only way to avoid this is not to take money and not go public. There are many successful examples of this - Iscar Ltd., for one. The board of directors represents the shareholders, and both managers and shareholders forget this.

The fact that Check Point’s share has been a disappointment should not drive long-term investors to switch to McAfee or something like it. Long-term investors, who are the big money and the foundation of value for a company, are prepared to wait a long time, and even invest more if they still believe in a company’s future.

Steinnon’s open letter to Shwed unquestionably expresses investors’ mood. They’re basically telling Shwed that something isn't working properly and that they’re losing confidence in him. This confidence has been like a rock for years, but something has happened and the company is losing its primacy. This is what investors are saying, and they’re voting with shares.

There was complete confidence in Teva Pharmaceutical Industries Ltd. (TEVA) until recently, despite the fall in its share price. If I were to ask ten investors if they plan to sell Teva, they’d reply, “Of course not.” The departure of Teva president and CEO Israel Makov slightly undermined this confidence, but I think this will be fleeting, until analysts and investors decide on the character of his replacement, Shlomo Yanai.

CHKP 1-year chart:

Published originally by Globes [online], Israel business news - www.globes.co.il © Copyright of Globes Publisher Itonut (1983) Ltd. 2006.
Republished on Seeking Alpha with full permission.