First, let's start by saying Symantec (SYMC) was never in really bad shape. Even though revenues and operating margins were stagnating, the company was generating adequate cash flows while maintaining a reasonable share of the market. CEO Steve Bennett has been running the company for approximately one year now and announced the unveiling of his strategic plan for the company around six months ago. The plan contemplates some cost reductions and an increased focus on customers which could enhance value for investors. The cost reduction program will include reorganization of the sales team and getting rid of a considerable proportion of middle management. By selling some non-core assets and redesigning service packages, Bennett hopes to achieve mid-single digit revenue growth with an operating margin of 30% against the present 24%.
No shift in market focus
There will be no fundamental shift in market focus, which is wise, given its present dominance. Symantec is by far the market leader in consumer security, with twice the share of Intel's (INTC) McAfee and a commanding lead on other competitors like Trend Micro. However, it does not have such a dominant position in enterprise business, but it is not doing too badly either. The company has an estimated 1/3 of the enterprise backup/recovery market, with almost twice the share of EMC (EMC) and IBM (IBM) and is also competing strongly in enterprise endpoint security, though it does not have a complete range of network security products. The company is not as strong as it would like to be in storage management, but manages to compete against the likes of EMC and IBM. It is clear that the company cannot survive in the long term merely by churning out improved versions of its existing products.
What the analysts say
Symantec has been reiterated by TheStreet Ratings as a buy. According to the firm, revenue growth has been slightly above the 1.7% which is average for the industry, though the revenue growth has not been translated into growth in EPS which has in fact declined. The gross profit margin is high but the net profit margin of 10.75% is lower than the industry average. EPS has declined considerably in the most recent quarter compared to the same quarter of the previous year however; this trend is expected to reverse itself. For the past fiscal year, the company has reported an EPS of $1.07 a share compared to $1.57 a share in the previous year. The market expects an improvement to $1.89 per share in the current year.
Prospects for a turnaround
Turnarounds in technology are never easy to accomplish because of the short: product cycles and the inexperience of technology managers in coping with businesses with low rates of growth. Bennett has plenty of experience with turnarounds during his 23 years at GE (GE) and says that he has accomplished between five and ten of them during his career and knows the methodology. Many of Symantec's problems come from the acquisition spree that it indulged in the past, like its $13.5 billion acquisition of Veritas. It never bothered to make the tough decisions, especially in rationalizing the number of managers and the redundant back room staff. Consequently, Bennett established during his review that 30% to 40% of management positions needed to be eliminated.
Trimming the fat
Sales productivity, measured by the sales generated for every dollar spent on sales and marketing, shows that Symantec is way behind its large peers. For instance, it generates around $2.50 in revenue for every dollar spent compared to $5.35 for Oracle (ORCL) and $4.41 for SAP AG (SAP). Sales and marketing expenses currently account for almost 40% of revenues, and Bennett wants to reduce this to 27% by 2017 and has already achieved improvements in margins by reducing this spend by more than 2% in his first full year. If the company achieved its 27% goal, the EPS could possibly be better than $3.00 per share.
The bottom line
The analyst price target estimates are a mean of $26.48 and a median of $27.25 against the present price of about $23.83. I personally believe that even if the management initiatives show some results in the short term, there is justification for a valuation of $29.00, which means that there is a potential upside of approximately 20% in addition to the dividend yield of 2.5%.