Should You Check Out CheckPoint Software?

Check Point Software (NASDAQ: CHKP) has been a great company for decades. But after a great earnings report, is it still a good stock to own?

Check Point is a $1.2 billion revenue Israeli maker of computer network security products -- the world's second largest. And Monday its stock hit a 10 year high after rising 88% in the last year. Thanks to rising demand for its products resulting from well-publicized hacking attacks at Sony Corp. (NYSE: SNE), EBay (NASDAQ: EBAY) the Central Intelligence Agency and the Pentagon, Check Point raised its 2011 EPS forecast from $2.75 to $2.84.

Here are three other reasons to own its stock:

• Out-earned its capital cost -- at an accelerating rate. Check Point earned more after-tax operating profit than its cost of capital, and it's gaining ground fast. Check Point's  EVA momentum which measures the change in “economic value added” (essentially, profit after deducting capital costs) divided by sales was 11%, based on first six months' 2010 annualized revenue of $1 billion, and EVA that rose from $145 million annualizing the first six months of 2010 to $261 million annualizing the first six months of 2011, using an 8% weighted average cost of capital.
• Excellent second quarter earnings. Check Point's second-quarter net income climbed 24% to $128 million -- beating nine analysts' estimates of  $125 million. Its EPS of 68 cents a share beat expectations by two cents. Its operating margin widened from 46.7% to 50.1%. And Check Point's revenues of $301 million were 15% higher than in the previous year.
• Rapid growth and solid balance sheet. Check Point  has grown quickly. Its $1.1 billion in revenues have increased at an average rate of 13.6% over the last five years and its net income of $502 million has risen at a 7% annual rate over that period. And its cash has remained constant at around $1.1 billion with no debt.

One problem is that Check Point is an expensive stock. Check Point's price to earnings to growth (PEG) ratio of 2.53 makes it over-valued (a PEG of 1.0 is considered fairly priced). Check Point's  P/E is 26.6 and its earnings are expected to grow 10.5% to $2.91 in 2012.

The best justification for buying this stock is that if its earnings keep growing at 24% or more, then its current stock price will look reasonable. This is one stock that has good odds of continuing to grow fast because highly publicized hack attacks seem to be growing. And this will just boost demand for its products.