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Summary

  • Concerns are mounting over the company’s ability to reach its 5% revenue growth/30% operating margin mid-term targets.
  • We believe that these targets will be slightly delayed due to increased short-term investments, but there’s nothing to really worry about: the turnaround plan is well on track.
  • A solid turnaround plan, likely mid-term EPS upside and low valuation levels make Symantec an attractive story for long-term investors.

For Symantec (NASDAQ:SYMC), it looks like the CEO's honeymoon with investors is over, with the stock now down 25% from its August peak. Despite a strong FQ3 with both revenues and EPS coming in ahead of expectations ($0.51 vs. $0.42), investors punished a disappointing FQ4 guide (revenues of $1.615-$1.655bn and EPS of $0.40-$0.42, below consensus of $1.67bn and $0.46).

Importantly, investors started to get concerned about the company's ability to reach its mid-term 5% organic revenue growth and 30% operating margin targets as Symantec hinted at increased selling and marketing and R&D investments in coming months. This suggests limited operating margin leverage in FY15 after the 150bps margin gain (27% margin) expected in FY14 and does not fit with the margin expansion story.

Obviously, these investments are likely to slightly delay the 30% margin target but they should not come as a major surprise as CEO Steve Bennett has been vocal in recent quarters about Symantec's sales force reorganization and product revamping effort.

Moreover, these investments are unlikely to derail the turnaround plan which is already well on track as illustrated by the FQ3 operating margin which reached 30.1%, in line with the mid-term target.

We would highlight that until now, CEO Bennett has done a great restructuring job despite significant execution risks, leading Symantec to deliver ahead of expectations in many quarters. This gives confidence in Symantec's ability to reach its mid-term targets and therefore, we would not be overly concerned by a slight delay in the margin expansion story.

Even assuming no margin expansion in FY15, the stock is trading at only 11x 2015 earnings, well below peers. Check Point (NASDAQ:CHKP) for instance is trading at a 19x P/E.

Short-term catalysts are limited, but we believe that a solid turnaround plan, likely EPS upside and low valuation levels make Symantec an attractive story for long-term investors.

Source: Symantec: The Turnaround Is Still On Track