I received quite a surprise when I opened my computer this morning. Aside from Europe collapsing again I was hit with a big downgrade on a large position of mine. Goldman Sachs downgraded Symantec from hold to conviction sell and put it on their conviction sell list with a $14 price target.
I do not fool myself into thinking that Symantec does not have issues. As a matter of fact I know they have issues and there are a couple of business lines that make me cringe. The reason I own Symantec is because at six times free cash flow I believe their issues are baked into the cake, and the cake is still cheap.
What struck me about the downgrade was that the analyst predicted that free cash flow could fall to $1 billion dollars or a decline of 35%. I assumed that free cash flow had the potential to decline. With a 16% free cash flow yield there is still a margin of safety if free cash flow declines. But I did not think free cash would fall by that magnitude.
I looked at the assumptions that the Goldman analyst put into his Symantec model. He is predicting lower than expected sales and a large decline in margins but that was not enough to get free cash flow all the way down to $1 billion. That only reduced free cash flow to the $1.3 billion area. In order to get to $1 billion in free cash flow he had to lower his depreciation and amortization assumption and raise his capex assumption among other tweaks of his model. These new assumptions were way off what the rest of Wall Street had modeled in. It became clear to me that the Goldman analyst was torturing his spreadsheet in order to get it to a $14 price target. I suspect that he pulled these numbers from where the sun don't shine. I have had very good results in the past when stocks I owned went on the Goldman Sachs conviction sell list. I expect Symantec to be no different.