Why I'm Pounding The Table On Symantec

Symantec trades at a greater than 15% free cash flow yield (FCF/EV) or roughly 6.5 times free cash flow. I cannot recall ever seeing a liquid, large cap stock with fairly good earnings visibility trade at such a low multiple in a time with little market stress. Even during times of market stress few stocks of this kind ever trade so cheaply.

Symantec's earnings visibility is a function of its large recurring revenue stream. While Symantec is best known for its Norton anti-virus product, consumer sales make up less than a third of Symantec's revenue. Symantec's corporate security and compliance combined with storage and server management make up nearly 2/3 of Symantec's revenue. Of these revenues over 60%  are recurring.

Software investors are growth oriented and few are value oriented. This is the reason I believe this bargain is being made available.  I believe that an aggressive share repurchase could serve as a catalyst for shares to achieve a more reasonable valuation. Currently, Symantec is repurchasing shares at a pace of $800 million a year or a little less than 8% of enterprise value. They are likely to increase the pace of their share repurchases after the most recent decline in the stock.

CA Technologies traded at a 14.5% free cash flow yield this Summer and looked very similar to the way Symantec does now. Both are steady technology companies, with little of the growth that technology investors desire.  An activist stepped in and helped nudge the company into returning more cash to shareholders, which led to a nearly 40% rise from the lows.  Symantec trades at a cheaper valuation than CA did at its low point.


Onlooker from Troy said...

It seems like maybe starting a dividend could also be in their future.  What do you think?

Tsachy Mishal said...

Starting a dividend would probably quickly get the stock up, as long as it is significant. But I believe it is in the longer term interest of shareholders to repurchase shares at the current valuation. Once the stock trades at a more reasonable valution than I believe they should declare a dividend. I know that I am likely in the minority with this opinion.

Onlooker from Troy said...

I wasn't arguing for it as the best course, just speculating that it could be coming soon.  Realize that I don't have much knowledge of SYMC, just basing it on the cash flow, etc. and the trend of established tech companies paying divs.

Tsachy Mishal said...

I understood that you weren't arguing for one or the other. I was just explaining why my opinion differs from the consensus on what they should do with the cash

The nice thing about committing to a large dividend is that it ensures that management cant blow the money.