A reader recently emailed me touting the value potential in Symantec Corp (NASDAQ: SYMC), the security, storage and systems management solutions provider that most people know as a result of its hit Norton Antivirus product. The company has been transitioning from pure software-based solutions to the cloud, with a growing portfolio of Software as a Service (SaaS) offerings. My reader noted that the company has generated an average of $1.5 billion of free cash flow per year over the last five years, relative to a market cap of $13.75 billion, resulting in a yield of ~11%. Additionally, if not for non-cash charges related to restructurings, the company would have generated returns in the mid to high teens for each of the last four years.
Ok, I’ll bite. Let’s start with the cash flow.
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Symantec Corp - Cash Flows, 1994 - 1Q 2012
This is an incredible chart, showing massive growth in the company’s cash flows and free cash flows. In fact, as the next chart shows, this growth is essentially in lock-step with the company’s revenue growth. This is a desirable feature of any potential investment.
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Symantec Corp - Revenues and Margins, 1994 - 1Q 2012
The company has achieved impressive growth, but is this the end of the story? Unfortunately not. Let’s compare free cash flow (Cash Flow from Operations less Capital Expenditures) to free cash flow after acquisitions.
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Symantec Corp - Free Cash Flows, 1994 - 1Q 2012
Here we see that the company has consistently spent a great deal on acquisitions (the difference between the red and green bars each year). In fact, the company has spent an average of $1 billion annually over the last four years on acquisitions.This has largely fueled the company’s growth, and has led to a significant amount of goodwill on its balance sheet.
I am wary of companies that consistently make large purchases. Acquirers tend to overpay, and evidently SYMC is no different. The company was forced to write down $7.4 billion worth of goodwill in 2009 (representing a whopping 2/3 of the carrying value of Goodwill). Make no mistake-- this was real shareholder capital that was absolutely squandered on overpriced acquisitions. In the past management had overpaid for acquisitions by at least $7.4 billion (at least, this is the amount they were willing to admit to; there is still another $5+ billion worth of Goodwill on the books). This is money that could have been returned to shareholders, but instead went toward fruitless empire building.
Unfortunately, this is not the end of the story. As noted, the company has continued to spend liberally on acquisitions since its write-down, spending net $1.5 billion in 2010 of which $889 million was Goodwill. Will this have to be written down in the future? Only time will tell, but I am not optimistic. Therefore I ignore my reader’s FCF yield and focus instead on the much less impressive FCF after Acquisitions Yield, which accounts for the amount management feels compelling to squander on acquisitions. One more point: SYMC has acquired so many companies that it now has a wikipedia entry devoted to listing them (Its acquisitions outgrew its own entry. How appropriate).
My reader also pointed to the company’s strong adjusted returns. The goal of an analyst is to forecast how the company can be expected to operate in the future (thus allowing one to discount that performance to the present and arrive at a valuation). Thus, analysts tend to adjust away seemingly one-time events such as restructuring charges, which are assumed to not continue in the future. This allows the analyst to look through the fog at the underlying operations.
But is it safe to assume these one-time charges are indeed one-time only? In SYMC’s case, the answer is no. In the eighteen year period presented in the charts above, only one year was free of restructuring, impairment, or other “one-time” charges. One can hardly adjust these figures away when they occur nearly 95% of the time! This leads me to the conclusion that these charges are in fact part of the operations, and should not be adjusted away. Companies that undergo perpetual restructuring also tend to be shifting normal operating costs into accounts that most analysts adjust away, recognizing that this allows them to keep attention focused on (less accurate) non-GAAP earnings.
Here is one more chart before I conclude.
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Symantec Corp - Capital Structure, 1994 - 1Q 2012
I think this is the most damning evidence against the quality of SYMC’s management and board. For a company that generates such strong cash flows, the company’s addiction to acquisitions has led it to lever up an astonishing amount over the last five years. This level of debt adds a great deal of risk by reducing the company’s financial flexibility, and this alone would have been enough to keep me out of the company (though, management has kindly provided many more reasons for staying out).
Overall, I am extremely unimpressed with SYMC. I see a company that relies on acquisitions for growth, and as a result of this reliance has squandered a great deal of investor capital. SYMC operates with far too much debt and appears mired in perpetual restructuring. My recommendation to the company would be to focus on its core business, lay off of the acquisitions for a few years and-- for god’s sake-- pay down that debt. They may be the only company left in Silicon Valley that knows what it’s like to have creditors.
What do you think of Symantec Corp?
Disclosure: No position