Cybercrime is a global epidemic that is costing individuals and companies billions of dollars. Cyber-attacks are causing “the greatest transfer of wealth in history,” according to Gen. Keith Alexander, director of the National Security Agency and U.S. Cyber Command.

#-ad_banner-#

In the past year alone, industry-leading companies like Google (Nasdaq: GOOG), Mastercard (NYSE: MA), Yahoo (Nasdaq: YHOO) and LinkedIn Corp. (NYSE: LNKD) all suffered embarrassing security breaches that compromised personal customer information and valuable trade secrets.

And the trend is showing little sign of slowing. Security specialist Symantec Corp. estimates that cybercrimes cost U.S. companies $250 billion annually in intellectual property theft.

Clearly, there is financial incentive for companies and individuals to invest in additional cyber security to help protect sensitive professional and personal data and devices.

And it’s creating a huge investment opportunity in my favorite security specialist.

The company has doubled its earnings in the past five years, driven by an impressive 56% increase in sales. Those big gains have fueled the company’s share price, which is up more than 80% in the past three years despite pulling back 22% since April. 

Check Point Software Technologies Ltd. (Nasdaq: CHKP) is a software and hardware specialist that creates security systems to help companies and individuals block and contain Internet and enterprise threats. Although Check Point is a leader in its space, this is no technology giant that is past its growth prime like Microsoft (Nasdaq: MSFT) or Cisco Systems (Nasdaq: CSCO).

With a market cap of $10.4 billion, Check Point just passes the threshold of $10 million to qualify as a large cap. While the company has seen impressive growth in the past few years, its relatively smaller size makes it uniquely positioned to benefit from the growing trend in information technology security spending.

Bull Case for  Check Point 
The growing threat of cyber-crime is driving Check Point’s current customers to spend more on security. License renewals and software updates in the company’s second-quarter results, which were reported in July, saw revenue increase 13% to $201 million, outpacing overall sales growth of 9% to $329 million. That trend of current customers making bigger investments in security was also on display with larger deal sizes, with 40 customers logging transactions in the quarter that topped $1 million, an 8% increase from the same period last year.

But Check Point isn’t resting on its laurels; it is also aggressively pursuing new customers and markets, releasing a new product for the very hot cloud space early in the quarter called ThreatCloud that is gaining traction.

That strong sales growth is significantly helping its bottom line. Check Point boasts an unbelievable financial profile, recording an operating margin of 55% in its most recent quarter and a profit margin of 45% that is almost twice the industry average of 23%.

That strong margin and earnings profile has helped Check Point construct a fortress balance sheet, with $1.37 billion in cash and equivalents and no long-term debt. That will provide Check Point with the ability to absorb economic volatility and also invest in growth through research and development or acquisitions of new technologies or smaller companies.

One way the company is already putting that cash to use is by returning value to its shareholders, repurchasing $75 million in common stock during the quarter while also adding $1 billion to its total buyback pool. Check Point’s strong geographic diversification will also work in its favor, with 44% of revenue coming from the Americas, 39% from Europe, and 17% from Asia-Pacific, Japan, the Middle East and Africa.

Risks to Consider: Technology is a highly dynamic space that is notorious for having low barriers to entry. Although Check Point is firmly entrenched as a market leader in integrated security systems, new companies and technologies will always present headwinds.

Action to Take –> In spite of Check Point’s impressive earnings and financial profile, shares are currently trading 22% below the 52-week high of $65 after pulling back with the market in May. That has pushed its forward price-to-earnings growth (PEG) ratio to just 1.3, well below the 10-year average of 1.5 times. Returning to its traditional valuation would have shares of Check Point back to the 52-week high, a 28% gain from current levels.