Big discount + buyout rumors = what for SYMC?

November 7, 2018

Big discount + buyout rumors = what for SYMC?

For most of this year, the tech sector has been one of the most profitable areas of the market to be invested. That’s not all that surprising given that the industry’s performance throughout the market’s extended upward trend since 2009 has been led by this sector. Since the beginning of October, however, this sector has also paced the market to the downside, dropping almost 14% as measured by the SPDR Select Technology ETF (XLK) through October.

While the tech sector in general has enjoyed a nice upward run for most of the run even when you consider the recent correction, investors in SYMC have missed out on all of the fun. Over the past year, the stock is down a little over 22%, and almost 20% since the beginning of 2018. That decline includes a massive overnight drop in mid-May from around $29 to less than $20 after the company announced it was launching an internal investigation centered around accounting irregularities. That’s the kind of news that will scare away most investors, including die-hard fundamental and value investors, and it’s seen the stock push down to lows in the $18 range.



SYMC is a stock that might not sound familiar at first blush to the average consumer, but this is a company that has been around since the early 1980’s, building its reputation in that decade on security and antivirus software that became Norton Antivirus, the software that even most average computer users have heard about and is still a leading application in the security space. Throughout the 1990’s and into the new millennium, the company expanded its reach via acquisition to include storage management and deployment software and enterprise-level security software and services. Perhaps that long history is one of the reasons that the stock’s steep decline in price finally started to attract notice in the M&A (merger and acquisition) market; Tuesday the stock rallied more than 12.5% on rumors the company had been approached with a buyout offer by a private equity firm.

Is this an opportunity for average investors to buy into a stock that is priced at a steep discount to its historical levels? Perhaps; the buyout is nothing more than rumor at this point, and could be substantiated or refuted at any point. If it is confirmed, the presumption is that the deal would come at a premium to the company’s enterprise value, which most analysts right now put at around $15 billion, and usually used as a starting point for identifying the price an acquirer would need to be willing to pay – before factoring in any kind of premium. How large a premium could shareholders see? That’s hard to estimate, because in many cases it depends on how desperate the buyer is for that company. Premiums of 10% to 20% above enterprise value aren’t uncommon. Consider also that activist investor Starboard Value – a company that specializes in turnaround opportunities – has taken a nearly 6% stake in the company and nominated five new board members to push for aggressive SYMC cutting and restructuring. Those are all developments that in the long run could spell opportunity for long-term investors who are willing to ride out whatever the market does to the stock in the meantime.



Fundamental and Value Profile

Symantec Corporation is a United States-based cyber security company. The Company offers products under categories, such as threat protection, information protection and cyber security services. Under threat protection, it offers Advanced Threat Protection, Endpoint Protection, Endpoint Protection Cloud, IT Management Suite, Email Security, Cloud, Data Center Security and Cloud Workload Protection products. Under the information protection category, it offers Data Loss Prevention, Encryption, Service, VIP Access Manager, and Data Loss Prevention and CloudSOC products. The Company also offers consulting services, customer success services, cyber security services and education services. Its cyber security services include DeepSight Intelligence software, which provides an analysis of attacks. SYMC’s current market cap is $14.4 billion.

  • Earnings and Sales Growth: Over the last twelve months, earnings  grew almost 43% while revenue growth a little over 5%. In the last quarter, earnings increased nearly 58% while revenues were mostly flat, rising just a little over 1.5%. The company operates with a profit margin profile that showed Net Income at a robust 25% of Revenues over the last year, but declined to -.05% in the last quarter. That decline is attributable, at least in part by the result of the company’s internal account investigation, which showed that $12 million of a $13 million sale in the last year was improperly reported and should have been deferred.
  • Free Cash Flow: SYMC’s free cash flow is healthy, at $966 million. This is a number that has increased steadily since the last quarter of 2016 when it bottom at around -$500 million.
  • Debt to Equity: SYMC has a debt/equity ratio of .75. Their balance sheet shows about $2.4 billion in cash and liquid assets versus about $4.4 billion in long-term debt, which is a pretty good indication that the company should have no problem servicing the debt they carry. I do see a red flag in the fact that cash has declined since mid-2016 from more than $6 billion to its current level.
  • Dividend: SYMC pays an annual dividend of $.30 per share, which translates to a yield of  about 1.3% at the stock’s current price.
  • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for SYMC is $9.31 and translates to a Price/Book ratio of 2.5 at the stock’s current price. This is an intriguing aspect of SYMC’s story, since the stock’s decline throughout the year has put the stock more 40% below its historical Price/Book ratio. If a buyout is completed, I don’t think the odds the deal will close very close to the $31 level this analysis indicates; but it does suggest that an acquirer could decide there is enough built-in intrinsic value to pay a higher premium. A 20% premium over their current price would put the stock at around $27 per share.



Technical Profile

Here’s a look at the stock’s latest technical chart.

 

  • Current Price Action/Trends and Pivots: The stock’s decline throughout the year is clear, and is punctuated by the gap in mid-May that marks the company’s disclosure of its internal investigation that has kept investors on edge – until yesterday, that is. The stock’s nearly 13% one-day surge pushed the stock above resistance around $22 per share. If that bullish momentum holds over the next couple of days, it isn’t at all unreasonable to suggest the stock could start to fill that mid-May gap; even if it only fills it halfway, the stock would increase to around $25.50, which is right around the stock’s most immediate resistance from previous pivot points. If, however the stock pivots to the downside, don’t be surprised to see it test its trend lows in the $17.50 to $18 range.
  • Near-term Keys: Is SYMC a stock to buy and hold and hope that the buyout rumors are true? Only you can decide that for yourself. I think the best trading probabilities right now center around the way the market treats yesterday’s events in the near term. If the stock pushes above Tuesday’s closing price, and can hold that level for the next couple of days, there is probably a pretty good bullish opportunity for a short-term momentum trade using call options. A pivot back down, on the other hand, with a push down to about $21 is probably a good signal that yesterday’s move is about as good as it is going to get for the time being; in that case, consider shorting the stock or buying put options with a target price in the $17 range. I’m not entirely sure the stock’s fundamentals justify the 40% value proposition right now; the negative net income in the last quarter is a big red flag as is the deterioration of their cash and liquid assets.