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A Leader in the Global Security Software

August 20, 2014 | About:
ovenerio

ovenerio

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In this article, let's take a look at Symantec Corporation (SYMC), a $16.74 billion market cap company, which is a provider in security, backup and availability solutions.

Overview

The segments now are: the User Productivity and Protection segment which accounted for 43.1% of revenues in FY 13 (March), Information Management segment 38%, and the Information Security accounted for 19%.

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.

Outlook

We can project a modest financial performance due to recent history. Symantec is targeting a long-term revenue compound annual growth rate over 5% and operating margins above 30% in fiscal 2017.

The company should improve in the IT security and management industries. But, before any other forecast, it must make an operational improvement.

Main Risk

Although the company is a leading provider of IT security, storage and management tools; it has been poorly managed. Proof of that is that it has failed to integrate acquisitions and execute on stated guidance. Moreover, the departure of CEO Steve Bennett is not good news because it leaves the firm with a lack of leadership and strategic guidance. This means that, if no clear direction from the top exists, it increases the risks.

Management

The management plans to optimize its mature businesses such as Norton and information availability for better margins, while it reinvests cash proceeds in higher-growth businesses such as NetBackup, mobile, data loss prevention and managed security services.

The mobile computing is enjoying a good growth while others continue to see more modest ones. I expect Symantec can increase its product´s portfolio in promising segments such as mobile messaging.

Revenues, margins and profitability

Looking at profitability, revenue growth by 1.52% led earnings per share increased in the most recent quarter compared to the same quarter a year ago ($0.34 vs $0.22). During the past fiscal year, the company increased its bottom line by earning $1.27 versus $1.06 in the prior year. This year, Wall Street expects an improvement in earnings ($1.89 versus $1.27).

Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

Ticker

Company

ROE (%)

SYMC

Symantec

15.49

MSFT

Microsoft Corporation

26.17

NOW

ServiceNow Inc

-18.7

N

NetSuite Inc

-33.52

MCRS

Micros Systems Inc

15.37

 

Industry Median

6.8

The company has a current ROE of 15.49% which is higher than most of its peers. In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. It is very important to understand this metric before investing, and it is important to look at the trend in ROE over time.

1408506967240.png

Relative Valuation

In terms of valuation, the stock sells at a trailing P/E of 17.6x, trading at a discount compared to an average of 47.8x for the industry. To use another metric, its price-to-book ratio of 2.91x indicates a premium versus the industry average of 2.9x while the price-to-sales ratio of 2.6x is above the industry average of 2.25x.

As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10,000 five years ago, today you could have $15,950, which represents a 9.8% compound annual growth rate (CAGR).

1408506930486.png

Final comment

As outlined in the article, Symantec is a market-leader in solutions in IT security, storage, and systems management. Founded in 1982, it has operations in over 50 countries. In the long term, I think it will be able to generate modest organic growth. But with today´s PE relative valuation and the return on equity that significantly exceeds the industry average it make me feel bullish on this stock.

Hedge fund gurus like Richard Snow (Trades, Portfolio), Chuck Royce (Trades, Portfolio), Jim Simons (Trades, Portfolio), John Buckingham (Trades, Portfolio) added this stock to their portfolios in the second quarter of 2014, as well as Manning & Napier Advisors, Inc., Third Avenue Management (Trades, Portfolio), Hotchkis & Wiley and Dodge & Cox.

Disclosure: Omar Venerio holds no position in any stocks mentioned

About the author:

ovenerio
We provide independent fundamental research and hedge fund and insider trading focused investigation.

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