My Trip To Symantec Analyst Day

There are few things I hate more than public speaking. One of those things is losing money. Losses in Symantec led me to the Symantec Analyst Day in San Francisco in order to try and nudge Symantec management to return more cash to shareholders. I believe shares of Symantec are grossly undervalued and that the solution to this undervaluation is quite simple.

Symantec trades at six times free cash flow. If Symantec directs all its free cash flow to share repurchases there will either be no more shares left in 6 years or the stock will be much higher. The latter is far more likely. Its simple math. In the past decade Symantec has spent $20 billion on acquisitions. The current enterprise value of Symantec is $9.5 billion. Assuming no value for the preceding company the market believes that Symantec destroyed $10.5 billion in capital.

The environment at the analyst day was very pleasant. All the analysts and company management knew each other. There was a continental breakfast, refreshments and gift boxes. The questions by analysts were mostly softballs as analysts need to maintain their access to management. Given this environment it was doubly hard to speak publicly because my question stood out. I tried to ask my question in as polite a manner as possible but the CFO danced around my question so I had to follow up in a more direct manner.  The recording and transcript of my question and answer follow: ( I recommend reading the transcript rather than the YouTube video. The British accent makes the CFO's response sound convincing. But reading the words makes it obvious that my questions were largely ignored)


Analyst: Tsachy Mishal

Question – Tsachy Mishal: Tsachy Mishal, TAM Capital Management. At a 17% free cash flow yield, how can any acquisition stand up to that test? It's a business that you know and you can get a 17% after-tax return. Why not put even more money into the share repurchase?

Answer – James A. Beer: Yeah.

Question – Tsachy Mishal: And secondly,  while I believe a share repurchase is better (than a dividend) you can still commit to shareholders by saying we'll return $5 billion over the next three years. It doesn't necessarily have to be a dividend, but why not a commitment versus just saying we're repurchasing aggressively, which could stop tomorrow?

Answer – James A. Beer: Well, so let me address a few themes there. First of all, I do think it is important to continue to have a balance between the use of capital in terms of returning it back to shareholders and using it on acquisitions that will allow us to accelerate our strategy, get time to market faster, and that will drive additional cash flow generation streams out into time. Again, we've got good opportunities, we're right in the middle of very good markets, but they're evolving relatively quickly.

And it's important that we make the right moves in terms of M&A in a disciplined way, sensible prices, real focus on integration. And so we'll continue to have that type of perspective, and I think that will be important to driving those top line type projections that I offered, that will drive the sort of cash flow generation, that will drive the present value, that will drive stockholder value.

Now in terms of the buyback volume and so forth, last year we used an amount basically equal to the generation of our U.S., of our onshore cash flow from operations. We deployed an amount equivalent to bring down our share count net 4.3%. That's a strong record, I would argue, by any measure. And further, I would argue that while I accept your notion that it can be turned off, I think you have to look at the history.

For the last six years that I've stood on this stage, we have consistently bought back a large volume of shares every year, through some of the most difficult macroeconomic climates that the country has faced in decades. And so I think we have built a consistent record that is illustrative of the seriousness of intent that we have in terms of returning shareholder value.

Question – Tsachy Mishal: Could I follow up...?

Answer – James A. Beer: Yeah.

Question – Tsachy Mishal: In the past decade, you've spent $20 billion on acquisitions, enterprise value is $9.5 billion. It's not working. Why do you think that that's suddenly going to change?

Answer – James A. Beer: Because we have strong market opportunities in front of us. We're very focused around the value that we put into acquisitions, and we're very focused on integrating to get the value out of those acquisitions. We back that up by reporting to you on what we expect each quarter coming from an acquisition, so you can very much hold us to account if you will in terms of our integration performance.

10 comments:

Randolph Bertin said...

So I guess the question is whether they will benefit from the "strong market opportunities" in front of them more so than they did from the previous $20 billion acquisitions. It's hard to imagine doing worse. At any rate, in spite of a lack of specific dollar commitment to share repurchases, they appear to recognize the (under)value of their own stock and are actively repurchasing shares. We'll see how it plays out over the next several years.

Wednesday 7atSeven: energy ennui | Abnormal Returns said...

[...] Symantec ($SYMC) management does not like having its errors pointed out at its annual shareholders meeting.  (Capital Observer) [...]

Tsachy Mishal said...

I spoke to the CFO after the event. He knows the stock is very cheap.

Wednesday 7atSeven: energy ennui said...

[...] Symantec ($ SYMC) management does not like having its errors pointed out at its annual shareholders meeting.  (Capital Observer) [...]

Brent Barber said...

I wonder if there may be some tax considerations here - he said they purchased "an amount basically equal to the generation of our U.S., of our onshore cash flow from operations".
It kind of implies that they spent all the U.S. money they could, and if they wanted to do more, they'd have to repatriate capital which would incur more taxes and hurt the report EPS.

Tsachy Mishal said...

They have over $800 million in US cash available and generate most of their cash in the US. They can easily borrow in the US against their overseas cash if necessary. If there is a will there is a way.

Tsachy Mishal said...

Last year I attended the CA investor day. The CEO gave me the same excuse. An activist came in and they found a way. Here is a recording of my question at last years CA investor day. http://capitalobserver.com/?p=6448

The CA CEO Said The Same Thing said...

[...] few readers have asked about Symantec’s overseas cash, which the Symantec CFO used as an excuse of why the pace of share repurchases cannot be increased. I will respond to this but I first want [...]

asad b said...

Tech companies love to buy other companies it shows them that they are players and movers in the market.  See FB, Google, Cisco... most of those acquisitions don't work out so well for the shareholders.  I remember someone doing an analysis of Cisco's acquisitions it was basically a transfer of money from shareholders to start-ups many of which had been started by ex-Cisco employees.

Tsachy Mishal said...

I agree. Its likely the reason so many large cap tech companies trade at such a big discount to the market.