Our stock pick this week is one that has great potential in 2015 and beyond, as online security becomes a bigger issue in light of the most recent hacking attacks. A company that is realigning its focus to better a product that is in increasing demand is great for a portfolio. Our stock pick this week is that kind of technology and online security company: Symantec Corporation (SYMC).
Protecting Computers is of Utmost Importance Now
Symantec provides security solutions for numerous Internet-connected devices including cell phones, computers, and even data centers. Symantec is probably most known for its security platform, Norton Suite. With the recent hacking attack on Sony Pictures, an even greater focus is being put on cyber security and Symantec is positioning itself to be a key provider. Gartner projects sales of security software and hardware to increase 9% this year, to $72 billion.
Realigning the Business
In October, Symantec (SYMC) announced that it would be splitting its business into two independent companies, one focusing on security and one focusing on information management. This announcement was something investors had been asking about for a few years. The stock is up nearly 7% since this announcement, and management believes this split will allow both companies to focus on their core products and maximize profits. Management also lowered full year forecast as the restructuring took place. This creates a great entry point for long term investors looking to own an important business like Symantec.
In its third quarter earnings release in 2014, Symantec announced slightly lower revenues, attributed mostly to product line restructuring. However, operating profits increased 40% year over year, and operating margin increased to 53% (up 10 percentage points) in the important Consumer Security segment. Product restructuring, mainly related to Norton Product Suite, was announced in May 2014 and was aimed at reducing costs while also exiting unprofitable deals with OEMs. These steps appear to be working quite well given the margin improvements.
Strong History of Profitability
Looking further into the success of Symantec is also a key to its designation as stock pick of the week. Over the past five years, Symantec has grown after-tax profit (NOPAT) by 10% compounded annually. Over the same timeframe, the company has increased its return on invested capital (ROIC) from 5% in 2009 to 9% this year.
Excellent Buying Time
Symantec’s stock price was up only 7% for all of 2014, underperforming when compared to the S&P 500. However, this year could be quite different as the company narrows its focus going forward.
At its current price of ~$25/share, Symantec has a price to economic book value (PEBV) of 1.0. This ratio implies the market expects Symantec’s NOPAT to never grow from its current levels. Given the company’s initial success in its restructuring, as well as growth in the overall security software industry, this expectation seems overly pessimistic.
If we assume Symantec can grow NOPAT by 8% compounded annually for the next 10 years, the stock is worth $35/share today –– an impressive 40% upside. Symantec’s jettisoning of its auxiliary business and its renewed focus on cyber security will allow it to grow at an even greater rate than it has the past five years. While nothing is ever certain, the successful execution of this restructuring would create even more upside in SYMC.
Symantec is a great buy in today’s market full of overvalued companies. This is a company that has an excellent history of profitability, and is providing a product that is now in greater demand than ever before.
Kyle Guske II contributed to this report.
Disclosure: David Trainer and Kyle Guske II receive no compensation to write about any specific stock, style, or theme.
Photo Credit: Martin McKeay (Flickr)