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Symantec Corp After Reporting Better Than Expected Earnings: Profitability Analysis

February 05, 2014 | About:

Profitability is one of the main factors one must look at when analyzing a company. It is not only the reason behind a company’s existence, but also a key element when determining whether to invest in a company or not. Thus, in this article I will look into Symantec Corp (SYMC)´s earnings and earnings growth (which came in better than expected on the last reported quarter), profit margins and other profitability ratios.

Additionally, I will evaluate which institutional investors bought the stock in the recent quarters (institutional backup can tell a lot about a stock), and the initiatives that the company is putting in motion in order to ameliorate its sales and margins.

Earnings

The first step is analyzing Symantec Corp’s earnings growth. I am looking for companies that are able to expand both their quarterly and annual earnings by more than 15% a year. Last quarter the company generated 13% quarterly EPS growth when compared to the same quarter last year. Thus, I am not encouraged by SYMC’s numbers. Past growth winners (Apple, Baidu, etc.) generated consistent quarterly EPS growth above 15% and I am certainly looking for that level before investing.

In addition, SYMC generated three-year average annual EPS growth of 10%. This is an important metric to follow in growth stocks because it highlights how well the stock grew in the past years. I like to invest in companies that are growing consistently.

Revenue

Let's take a look at SYMC´s revenue growth. This is a key metric that needs to be analyzed before investing in a company, as it is one of the scarce figures that cannot be modified through accounting tricks and similar dodges.

The company reported a 5% quarterly revenue drop year over year. On the contrary, I look for companies that generate more than 15% in quarterly growth.

When betting on a company, an investor wants to see sales grow or improve over time — and not just in the last reported quarter. Looking at the company’s financials in comparison to previous years will give participants a much better idea of how well a company is doing. Symantec Corp generated a three-year average annual sales growth rate of 4%.

A New Strategic Plan

Accepting the problems in its past performance (poor management, integration difficulties, etc.), Symantec — led by its CEO Steve Bennett  has come up with a plan that aims at satisfying investors' expectations. The company’s new strategic plan will focus on better attending customer needs by revamping its product portfolio, restructuring its sales force and management team, and expanding its cloud platforms and e-commerce business, among other initiatives. At the same time, it will seek to improve the company’s complicated sales and marketing structure. Management expects this new scheme to generate organic revenue CAGR of more than 5%, and operating margins above 30% for fiscal 2015 (mainly on the back of its cloud infrastructure platforms).

In fact, the plan has been already retrieving encouraging results. For fiscal 2014, sales and marketing expenses (in relation to total revenues) decreased by 7.5%, to 37%, compared to the previous year. This reduction in operating costs is expected to continue as the plan advances.

To keep investors happy in the meantime, the company recently initiated dividend payments that are now projected at 2.94% of the current stock price.

Gross Profit Margin

The gross profit margin is a measure of a company's manufacturing and distribution efficiency during the production process. The gross profit tells an investor the percentage of revenue/sales left after subtracting the cost of the goods/services sold. A company that operates on a higher profit margin than its competitors is more efficient. Investors tend to pay more for businesses that have higher efficiency ratings, as these should be able to make a decent profit as long as overhead costs are controlled (overhead refers to rent, utilities, etc.).

Symantec has managed to make its gross margins grow over the past years, in spite of its questionable performance in other areas. The five-year low for the gross margin was reported at 80%. On the opposite, the five-year high for the margin was reported in 2012, when the company retrieved a 83.9% margin. In fact, the 2013 gross profit margin of 83.0% is above the five-year average of 82.3%.

A gross margin above the five-year average implies that management has been successful in making the manufacturing and distribution during the production process more efficient over the past five years. I like to find companies that operate with high profit margins.

Operating Margin = Operating Income / Total Sales

The operating margin is a measure of the proportion of a company's revenue that is left over after paying for variable costs of production, such as wages, raw materials, etc. A healthy operating margin is required for a company to be able to pay for its fixed costs such as interest on debt. If a company's margin is increasing, it is earning more per dollar of sales. Needless to say: the higher the margin, the better.

Over the past five years, the operating margin of Symantec Corp has been increasing. In 2008, the company reported an operating margin of -105.2%. In 2012 the margin reached 16.9%.

The 2013 operating margin of 16.3% is above the five-year average of -8.6%. This implies that there has been an increase in the percentage of the total sales left over after paying for variable costs of production such as wages and raw materials compared to the five-year average. I am always looking for companies that have improving operating margin trends.

Net Profit Margin = Net Income / Total Sales

A ratio of profitability calculated as net income divided by revenue, or net profits divided by sales. It measures how much out of every dollar of sales a company actually keeps in earnings.

The profit margin is a very useful metric when comparing companies in the same — or similar  industries. A higher profit margin indicates a more profitable company that has better control over its costs compared to its competitors. Profit margin is displayed as a percentage; a 20% profit margin, for example, means the company has a net income of $0.20 for each dollar of sales.

Over the past five years, Symantec Corp's net profit margin has been increasing in comparison to the five-year average margin. The TTM net profit margin of 12.9% is above the five-year average of -11.9%. This implies that there has been an increase in the percentage of earnings that the company is able to keep compared to the company's five-year average. The listed profitability margins show that the company is gaining strength.

Institutional Investors

I also evaluate recent institutional activity in the stock. In other words, which hedge funds bought the stock over the past few months.

In the recent quarter, both Dodge & Cox and Jim Simons (Trades, Portfolio) — among other prominent investors  bought SYMC at an average price of $23.70.

Analyst Outlook

Currently, many analysts have a good outlook for Symantec Corp Analysts at MSN money are predicting that Symantec Corp will retrieve EPS of $1.86 for fiscal year 2013 and an EPS of $1.87 for fiscal year 2014. Analysts at Bloomberg estimate Symantec Corp's revenue to reach $6.69 billion for fiscal year 2013 and $6.72 billion for fiscal year 2014. On Oct. 24, 2013, Standpoint Research gave Symantec Corp a rating of "Buy" with a target price of $25.14. A $25.14 price target signifies significant upside potential from this point.

Conclusion

Trading at only 16.4 times the company’s earnings (versus an industry average of 48x) while retrieving above average margins and returns (see table below), this stock certainly looks attractive.

 

Symantec

(SYMC)

Ind. Avg

Adobe Systems (ADBE)

Price/Earnings TTM

16.4

48.3

105.3

Price/Book

2.5

5.0

4.4

Price/Sales TTM

2.1

4.6

7.6

Operating Margin % TTM

16.9

13.9

10.4

Net Margin % TTM

13.0

9.6

7.2

ROA TTM

6.5

5.7

2.9

ROE TTM

16.1

10.5

4.3

Source: Morningstar

The problems that the company once experienced seem to be being corrected. With a strong position in the consumer segment and presence in more than 200 countries, Symantec seems poised to expand. At current price levels (the stock is down about 13% since the start of 2014), adding this stock to your long-term equity portfolio might be a good idea.

Disclosure: Vanina Egea holds no position in any stocks mentioned

About the author:

Vanina Egea
A fundamental analyst at Lone Tree Analytics

Visit Vanina Egea's Website


Rating: 4.8/5 (5 votes)

Comments

damianillia
Damianillia - 9 months ago

Great In-Depth Analysis. Thanks

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