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Value-Oriented Funds from Dodge & Cox – Is Symantec a Right Pick?

December 16, 2013 | About:
The fund looks to be long-term owners of companies whose current valuations don’t reflect their long-term earnings and cash-flow prospects. On Dec. 8, Dodge & Cox added Symantec Corporation (SYMC). The firm is a provider in security, backup and availability solutions. Let's take a look at this company and try to explain to investors the reasons this is an apparently appealing investment opportunity.

The Secret of Diversification

The User Productivity and Protection segment accounted for 43.1% of revenues in fiscal year 2013, the Information Management segment for 38.1%, and the Information Security accounted for 18.8% (this segment was the company's fastest grower at 8.6%).

It has many vendors offering a wide range of products. The company’s consumer products are Norton 360, Norton 360 Multi-Device, Norton Internet Security, Norton AntiVirus, Norton One, Norton Online Backup, Norton Mobile Security and Norton Live Services.

Some segments like Mobile Computing are having quite good growth rates; others continue to see more modest growth. I expect the company can increase its product portfolio in promising segments such as mobile messaging.

Valuation

In terms of valuation, the stock sells at a trailing P/E of 19.5x, trading at a discount compared to an average of 23.3x for the industry. Analysts’ expectations imply a forward P/E of 11.58. To use another metric, its price-to-book ratio of 2.8x indicates a premium versus the industry average of 2.38x, and the price-to-sales ratio of 2.3x is above the industry average of 1.85x.

Earnings per share (EPS) increased by 26% in the most recent quarter compared to the same quarter a year ago. In the next graph, we include the stock price because EPS often lead the stock price movement. The stock price is up more than 20% in the last 12 month, which is a positive sign for investors.

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Finally, I always like to see one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity. The ratio has decreased when compared to its ROE from the same quarter one year prior. This is a signal of major weakness. As we can see in the next table, the ROE is greater than Red Hat (RHT), but less than Micros Systems (MCRS), Commvault Systems (CVLT), Microsoft (MSFT) and Oracle (ORCL).

Ticker Company Name ROE %
SYMC SYMANTEC CORP 14,1
RHT RED HAT INC 9,9
MCRS MICROS SYSTEMS INC 15,4
CVLT COMMVAULT SYSTEMS INC 15
MSFT MICROSOFT CORP 27,7
ORCL ORACLE CORP 24,5


Final Comment

Symantec´s revenue growth of 9.9% is greater than industry mean, and I expect this to continue aided by Norton´s products which are the leading brand in its segments.

For a long-term perspective, I would advise fundamental investors to consider adding Symantec to their portfolios as growth, innovation and technological advancements have the potential to expand Symantec’s customer base.

Hedge fund managers have also been active in the company. Gurus like John Hussman, Jim Simons and Jeremy Grantham have invested in it.

Disclosure: Damian Illia holds no position in any stocks mentioned.

About the author:

Damian Illia
A fundamental analyst at Lonetreeanalytics.com constantly looking for value and income investments.

Visit Damian Illia's Website


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