Thursday, 30 January 2014

Symantec - the return of the US$22s

I am no huge fan of technical analysis but the return of the cyber security company Symantec to the US$22s share price level strikes me as noteworthy.

The fall in the share price today struck me as slightly surprising given the headline that accompanied the Q3 report:

What is going on here?

Three months ago - when the share last fell to around US$22 - the company noted on the conference call (with my emphasis added):

'We went from traditional generalists, selling 150-or-so point solution to sales people that are now Information Management or Information Security Specialists. We clearly lost more momentum than we expected in the transition and are working hard to address all the critical levers to accelerate progress in building a robust new business pipeline in Q3 and Q4, so we regain our positive momentum going into fiscal year '15'.

So how has the sales momentum been?  Well the last 9 months numbers for 2013 (Symantec's year end is 31st March) are shown in the penultimate column...and the momentum does not look the greatest, especially compared to the equivalent period a year previous (last column on the right). 

Additionally this lack of momentum is anticipated to continue into the final quarter of the current fiscal year, admittedly counteracted a little by rising margins. 

So the sales recovery is still to be seen.  Compounding this was a more fuzzy forward view.  This quote from CEO Steve Bennett on the conference call captures it well:

'We are still focused on our 5 and 30 objectives in the FY‘15 to FY‘17 time frame. However, to drive organic revenue growth, we need to invest in our offerings and other growth enablers in FY‘15. We will continue to identify and eliminate redundancies and hidden factories to drive improved efficiency and better resource allocation across the company...We still need to dig our way out of the deferred revenue hole we dug this year which will impact revenue in FY‘15. We expect further operating margin expansion to come in the fiscal ‘16 and ‘17 as we focus on rebuilding our business activity and positioning ourselves to win in the future'.

That sounds to me as if the year to March 2015 is going to be more of an 'investment year'.

However I do note that the company does continue to generate free cash (c. US$620m in the nine months since the end of March 2013 - admittedly lower than the c.US$755m in the equivalent period a year before).  Still, annualise this up and the free cash flow yield is around 6% of which 2.6% is paid out.  Symantec additionally still retains around US$700m of outstanding share buyback capability and has net cash on the balance sheet of around US$1bn. 

Using the company's guidance - and taking into account the share price fall today - the company trades on a static March 2014 multiple of x11.5 EV/ebit.  For the opportunity to access a compelling theme like cyber security that seems good value...but less so for a company that is struggling still to move forward. 

I concluded back in October that buying Symantec shares is a management turnaround call.  This is certainly still true.  Do I still see value here?  Yes.  Is the share likely to exhibit surprising momentum based on massively better numbers than hoped later this year?  Possibly not.  On balance a value buy/hold still in anticipation of what the company could become.  In a portfolio though more growth/nearer-term catalyst stocks should be put around it for balance. 

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