Symantec: A Long-Term Investment Opportunity In An Attractive Tech Stock

| About: Symantec Corporation (SYMC)
This article is now exclusive for PRO subscribers.

Summary

Symantec is the second top-ranked stock in my portfolio.

Symantec will continue to benefit from the increasing demand for anti-hacking tools and from its new partnership with HP to develop a new Disaster Recovery as-a-Service solution.

Symantec is generating strong cash flows and returns value to its shareholders by stock buybacks and dividend payments.

In my previous article "My Best Large-Cap Stocks Portfolio" I introduced my stock selection strategy based on ranking stocks, according to Portfolio123's "ValueSheet" ranking system. Symantec Corporation (NASDAQ:SYMC) was the second top-ranked in my portfolio, after Gilead Sciences (NASDAQ:GILD) that came first. On August 11, I wrote an article about Symantec describing the company and recommended the stock. In this article, I will highlight some recent significant developments in the company's activity.

According to Symantec, cyber criminals become more devious and the attacks they launch become more sophisticated. The damage to Sony after last week's hacking of its network is a reminder of how grave and dangerous hacker's attacks are these days. Symantec continues to benefit from the increasing demand for anti-hacking tools. According to Gartner, a rise in computer attacks is spurring sales of antivirus programs as more people stay online, with global spending on security software and hardware projected to climb 9.1 percent this year to $71.7 billion.

On November 19, Symantec and Hewlett-Packard (NYSE:HPQ) Enterprise Services announced a joint partnership to develop a new Disaster Recovery as-a-Service solution based on HP Helion OpenStack. The HP Helion and Symantec Continuity offering will help enterprise and SMB customers to minimize recovery times, data loss, and associated downtime costs. According to Symantec, the increased variance of enterprise data storage environments has created a need for a disaster recovery solution that works across multiple computing environments, including on-premises, public cloud and managed cloud. I believe that the new partnership between Symantec's industry-leading business continuity software with HP's world-class enterprise services will benefit both companies and will contribute to growth prospects for Symantec. The new Disaster Recovery as-a-Service solution is highly required since it focuses on business continuity, failover and failback and will monitor the most widely used applications and databases in the market.

On October 09, Symantec announced that its Board of Directors has unanimously approved a plan to separate the company into two, independent publicly traded companies: one business focused on security and one business focused on information management. Symantec's decision to pursue a separation follows an extensive business review of the company's strategy and operational structure. According to the company, creating two standalone businesses will allow each entity to maximize its respective growth opportunities and drive greater shareholder value. Michael A. Brown, Symantec president and chief executive officer, said that it has become clear that winning in both security and information management requires distinct strategies, focused investments and go-to market innovation.

The separation will allow each company to:

  • Focus on its unique growth opportunities, R&D investments, and go-to-market capabilities
  • Reduce operational complexity
  • Enhance strategic flexibility, pursue partnerships, and develop independent M&A strategies
  • Set distinct capital allocation policies

In my view, Symantec's decision to separate the company into two independent publicly traded companies will benefit stockholders with better execution and focusing on growth, the sum of the two new companies' market value will probably be higher than that of the original company.

Valuation

Symantec's valuation metrics are good. The forward P/E is low at 12.68, and the Enterprise Value/EBITDA ratio also is low at 8.28. However, the EV/EBITDA ratio was even lower in several periods during the last five years, as shown in the chart below.

SYMC EV to EBITDA (<a href=

SYMC EV to EBITDA (N(NYSE:TTM)) data by YCharts

Symantec's Margins and Return on Capital parameters have been much better than its industry median, its sector median and the S&P 500 median, as shown in the tables below.

Source: Portfolio123

SYMC's stock has slightly underperformed the market this year and in 2013. Since the start of the year, SYMC's stock has gained 9.2% while the S&P 500 index has risen 11.5%, and the Nasdaq Composite Index has increased 13.7%. Moreover, since the beginning of 2013, SYMC's stock has gained 36.8%, while the S&P 500 index has increased 44.5%, and the Nasdaq Composite Index has risen 57.3%. Nevertheless, considering its good valuation metrics and solid earnings growth prospects, the stock, in my opinion, has plenty of room to move up.

Chart: TradeStation Group, Inc.

Symantec has been paying dividends since June 2013 and has not increased its quarterly payment of $0.15 ever since. The forward annual dividend yield is at 2.33% and the payout ratio is at 42.6%.

Management expects to allocate about $900 million or 90% of free cash flow to dividends and share repurchases this year. Net cash provided by operating activities was $670 million in the first two quarters of fiscal 2015 and $1.281 billion in the fiscal year 2014.

Symantec will report its third quarter fiscal 2015 financial results on February 05. The company is expected to post a profit of $0.49 a share, a 3.9% decline from its actual earnings for the same quarter a year ago. However, Symantec has been able to show an earnings per share surprise in each one of the last five quarters. Therefore, there is a good chance that Symantec will continue to surprise by reporting better than estimated results also in the current quarter.

Data: Yahoo Finance - Analyst Estimates

Conclusion

Symantec will continue to benefit from the increasing demand for anti-hacking tools and from its new partnership with HP to develop a new Disaster Recovery as-a-Service solution. Furthermore, Symantec's decision to separate the company into two independent publicly traded companies will benefit stockholders, in my opinion. Symantec has good valuation metrics and solid earnings growth prospects. Its EV/EBITDA ratio is low at 8.28. In addition, Symantec is generating strong cash flows and returns value to its shareholders by stock buybacks and dividend payments. In fact, Management expects to allocate about $900 million or 90% of free cash flow to dividends and share repurchases this year. All these factors bring me to the conclusion that SYMC's stock is a smart long-term investment.

Disclosure: The author is long SYMC.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.