Symantec (SYMC) one of the world's largest software companies with more than 20,500 employees around the world. It provides security, storage and systems management solutions across the spectrum of users from consumers to enterprise.
For the last several years, Symantec has disappointed investors. The company engaged in several high cost acquisitions, which did not bring value. More recently, Symantec has taken firm steps to reverse this decline, and management has articulated a sensible plan for moving forward.
In the first instance, the Board of Directors fired its CEO, Enrique Salem, in July, and replaced him with Steve Bennett, a former CEO of Intuit. Secondly, the company has split the job of CEO and Chairman. According to a company-issued press release, the board of directors has elected director Dan Schulman to the position of non-executive chairman, while Steve Bennett remains president and chief executive officer.
The next bit of good news is that the company also announced a new, and I think sensible, strategy. Essentially, the company is going to cut its bureaucracy by eliminating management positions, reorganize the sale's force, expand marketing and increase investment in R&D. The company has decided, at least for the time being, not to sell off bits and pieces. However, in January, Bloomberg reported the Altiris unit to be on the block. The supposition is that the Altiris unit does not fit with the larger strategic plan.
The company has released a very ambitious outline of what it intends to accomplish over the next 6-24 months. This plan includes an investor-friendly introduction of a dividend expected to yield approximately 2.5%, and a $1.0 billion share buyback.
Over the last 5 years, the y-o-y growth in revenues has remained in the low single digits, except in FY 2010, when there was a plunge of 2.7%. The revenue growth rate is erratic, and has ranged over the last 7 years from a low of -2.7% to a high last seen in 2005 of 25.5%. Sales for the most recent quarter grew 4.4% compared to the quarter 1 year ago. Sales for the trailing twelve months grew at the rate of 1.74% year-over-year. Sales have grown at the rate of 5.3% for the last five years, and 14.7% for the last seven years.
Thomson Reuters reports revenue projections for the year ending March 2013 to range from $6,862.0 million to $6,898.83 million. The average estimate is $6,883.76 million. Estimates for the year ending March 2014 are higher, and range from $6,900.0 million to $7,130.74 million, with an average of $7,001.13 million.
EPS MRQ vs. y-o-y is down 6.3%, but EPS for the trailing twelve months grew about 54.4% when compared to the prior trailing twelve months. Average book value per share growth is 17.5% y-o-y as compared to the five year average decline of 15.2%.
Despite fluctuations in sales, Symantec has managed to expand gross margins from a low of 76.3% in FY 2006 to 83.3% in the most recently reported quarter. The five year average gross margin is 81.5%. Operating margins remain strong when compared to the industry median. For the MRQ, the operating margin is 16.6%. This compares well with the TTM operating margin of 15.6%.
Symantec is a moderately levered company with a debt to equity ratio of 40.6%. The company has a healthy free cash flow, which more than compensates for the leverage.
Receivables turnover has improved from 2011 when it declined to 6.6. In the most recent quarter, the receivables turnover improved to 8.1. Similarly, inventory turnover has improved from 38.0 in 2011 to 47.1 in the MRQ.
At the current PE multiple of 14.1, Symantec is well below the industry median of 25.8. This is in line with an overall downtrend for some years. The forward multiple of 12.9 for FY 2013 and 11.5 for FY 14 puts SYMC in a highly favorable position, and I expect the trend to continue in the near term. From a value investing perspective, the price to book ratio is high, yet close to the industry median of 2.7. The EV/EBITDA for Symantec is low compared to other industry players. The price to sales ratio also looks to be high from a value perspective, but this too is in line with the industry median of 2.1.
In my opinion, Symantec is undervalued on the basis of EV/EBITDA. This assessment of an earnings based valuation metric is confirmed by a cash metric, free cash flow to price. I calculate FCF/price to be 8.72.
The company is also very profitable on an earnings basis when using return on invested capital as the metric. I calculate ROIC to be 14.68%, and the complementary measure, cash return on invested capital, is 18.43%. The company's enhanced capital allocation strategy that, over time, is expected to return approximately 50% of free cash flow to shareholders through a combination of dividends and share repurchases while still enabling the company to invest in its future is a very positive development.