Monday, April 14, 2014

Don't Give Up on Symantec

This article was originally published by TheStreet on April 4, 2014
By Sarfaraz A. Khan. Research assistant: Gohar Yousuf
NEW YORK (TheStreet) -- Analysts hate Symantec (SYMC_) -- at least seven of them have downgraded the Internet security company. But I don't think it's as bad as you may think.
On March 20 Symantec fired CEO Steve Bennett, who has been running the struggling company for less than 20 months. Although Symantec has shied from giving specific reasons for the CEO's exit, rumors abound that Symantec was not satisfied with the pace of the turnaround. In 2012, the company fired Bennett's predecessor, Enrique Salem, in a similar fashion.

Since April 2009, a period covering both Salem and Bennett's tenure, Symantec's shares have risen by 34.3% and are currently hovering at $20. In the same period, the North American technology sector, as represented by iShares North American Tech-Software ETF (IGV), has climbed 133.9%.
The company has struggled with growth. It had declining revenue for two consecutive quarters and less than 3% overall growth in the last five years. But it has improved its margins by 680 basis points. With just a 7% cut in its operating expenses in the next results, Symantec could achieve its annual target.
Moreover, the company, which is the biggest player in its industry, could also be on the takeover radar. Symantec is currently trading at just 16.3 times its trailing earnings. That's cheap when compared with the industry's average of nearly 30 times.
The company's low valuation, coupled with the the CEO departures, could once again fuel takeover speculation, as in in 2012 following Salem's departure. Back then, Oracle (ORCL_) and IBM (IBM_) were discussed as potential buyers.
Under Salem and Bennett, Symantec's top line growth has been modest at best. Symantec's net revenues have reported an overall compounded annual growth rate of just 2.35%. Similarly, during this period, Symantec's earnings per share have grown by 3% on a compounded annual basis.
In the previous quarter, Symantec's revenue dropped 5% from last year to $1.71 billion. This was due to the weakness in the PC market, a 12% drop in sales in Asia-Pacific and ongoing restructuring efforts. This translated into adjusted earnings of 51 cents per share, which were up 13% from last year. That was better than analysts' expectations of a profit of 43 cents per share on revenue of $1.65 billion.
Symantec is targeting organic revenue growth of more than 5% and adjusted operating margin of 30% by fiscal year 2017. In these terms, Symantec has given mixed signals. While on one hand, Symantec has improved its profitability, on the other hand, it has achieved little in terms of top-line growth.
Over the last two quarters, Symantec's revenue have fallen. Thomson Reuters reports analysts are expecting an even bigger year-over-year drop of 6% in the fourth quarter. The company could post annual revenues of $6.69 billion, which would show a decline of 3.1% from last year. This annual estimate is in-line with Symantec's forecast.
On the other hand, in the third quarter Symantec's operating margins rose to 23.8% from an average operating margin of just 16.1% in the fiscal third quarters over the last three years. The company's profit margin came in at 16.6%, which is the highest for the fiscal third quarter since 2009.
Moreover, Symantec's adjusted operating margin climbed 420 basis points from the same quarter last year to 30.1%, which is in line with its 2017 target.
In the previous quarter, Bennett was able to rein in the company's operating expenses, which dropped by 14% from 2013, on the back of the massive job cuts.
While Bennett is delivering on the promise of reducing the firm's operating expenditure, the pace of the decline was slower than Bennett's initial plans. The CEO was targeting at least a $220 million reduction in annual operating expenses. By that measure, in the first nine months of the current fiscal year, the operating expenses should have fallen by $165 million. They are down by just $133 million, easily missing the mark by nearly $30 million.
However, it will deliver on Bennett's promise if, in its next quarterly results for the three months ending March 2014, Symantec manages to cut its operating expenses by just 7.4%.
In these terms, Bennett's performance wasn't all bad -- therefore his layoff in the middle of the turnaround came as a big shock to investors. This is why Symantec's shares are still down 2.7% since the announcement of Bennett's departure. Furthermore, the seven analyst downgrades have further exacerbated the situation.
Despite all its troubles, Symantec is the biggest security software vendor in the world. According to Gartner, the security infrastructure market could continue growing from $55 billion in 2011 to $86 billion by 2016. This growth could fuel Symantec's turnaround.
Symantec is facing increasing competition from Palo Alto Network (PANW_) and FireEye (FEYE_), as well as from McAfee, which is backed by the tech juggernaut Intel (INTC_). But, according to Gartner's most recent data, Symantec commands a massive 19.6% market share in the security software industry. The company's share is more than twice as large as that of its nearest competitor, McAfee.
At the time of publication, the author held no positions in any of the stocks mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.