SYMANTEC CORP. $25(Nasdaq symbol SYMC; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 690.2 million; Market cap: $17.3 billion; Price-to-sales ratio: 2.7; Dividend yield: 2.4%; TSINetwork Rating: Average; www.symantec.com) began operating in 1982. It’s now the world’s largest maker of security software.
Symantec is best known for its Norton anti-virus software, which helps protect computers from viruses and online attacks. It mainly sells Norton to consumers, but it also has agreements to pre-install it on new computers.
In addition to virus protection, Symantec has developed a range of other security programs under the Norton name, including software that guards against identity theft.
The company gets a large part of its ongoing revenue by selling software as a recurring subscription. With new computer threats constantly emerging, customers are willing to pay to use Symantec’s Live- Update feature to periodically update their software.
In July 2005, the company paid $13.2 billion in stock for Veritas Software, whose products store and protect information in large corporate databases.
Symantec felt Veritas would cut its reliance on the consumer market. However, the integration didn’t go as smoothly as Symantec hoped, and the company ended up confusing customers with too many products and pricing structures.
Narrower focus will pay off
Symantec’s revenue gained 15.4%, from $6.0 billion in 2010 to $6.9 billion in 2013 (fiscal years end March 31).
However, revenue fell 3.0%, to $6.7 billion, in 2014. That’s because the company reorganized its salesforce to focus on specific products instead of taking a more generalized approach. As well, one sales team now serves existing clients, while the other pursues new contracts. The changes disrupted the closing of new sales.
Earnings fell 12.1%, from $635.0 million in 2010 to $558.0 million in 2011. Symantec is an aggressive buyer of its own shares, so earnings per share fell 9.0%, from $0.78 to $0.71. Earnings then recovered to $1.61 a share (or a total of $1.2 billion) in 2012 and rose to $1.92 a share (or $1.35 billion) in 2014.
Symantec now plans to split into two publicly traded companies. One will keep the Symantec name and focus on security software and services. This business currently accounts for about 65% of its revenue.
The other firm, called Veritas Technologies Corp., will focus on data backup and recovery software (35% of revenue). Symantec expects to complete the spinoff in December 2015.
Veritas Technologies faces strong competition from larger firms, including Hewlett-Packard, IBM and Oracle. Spinning it off will let Symantec focus on the more promising security-software market.
For example, the company should benefit as more corporations upgrade their computer security in response to high-profile cyberattacks on Sony, Home Depot and Target.
High research costs a hidden asset
Meanwhile, Symantec continues to spend heavily on new products in response to increasingly dangerous online attackers. In the company’s September 2014 quarter, its research spending rose to 17.1% of revenue from 15.1% a year earlier.
Symantec is also enhancing its expertise in other ways. It recently hired engineers and licensed certain technology from Narus, a computer-security firm owned by Boeing Co. (New York symbol BA).
Narus has developed algorithms and software that can analyze large amounts of Internet traffic and filter out certain data, mainly for governments. Symantec will use Narus’s technology to develop new security software for corporations.
Symantec’s balance sheet is strong. As of October 3, 2014, it held cash and investments of $3.8 billion, or $5.50 a share. Its long-term debt was just $1.7 billion, or 10% of its market cap.
Growth should offset currency drag
Europe and Asia account for 45% of Symantec’s sales, so the higher U.S. dollar will likely dampen its growth. As a result, its fiscal 2015 earnings per share will probably dip slightly, to $1.90. However, its 2016 earnings could rise to $2.02 a share, and the stock trades at just 12.4 times that forecast.
The higher earnings should also give Symantec more room to raise its dividend. The current annual rate of $0.60 a share yields 2.4%.
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