By Alex Gavrish, Etalon Investment Research; author of “Wall Street Back To Basics”
Defense from activists
In the beginning of April, 2014 it was reported in the media http://www.bloomberg.com/news/2014-04-04/symantec-said-to-hire-jpmorgan-to-seek-options.html that according to some sources, Symantec Corporation (NASDAQ:SYMC) has hired JPMorgan Chase & Co. (NYSE:JPM) as a financial advisor to help defend itself against activist investors. The company had already been under pressure from activists in 2010, including such activist as Ralph Whitworth and his firm, Relational Investors. One of the options that activists considered was the separation of company’s storage unit from its consumer security business.
Company profile
Symantec Corporation (NASDAQ:SYMC) is a global leader in security, backup and availability solutions. Its innovative products and services protect people and information in any digital environment – from the smallest mobile device, to the enterprise data center, to cloud-based systems. Company’s software and services protect against advanced threats independent of the device and environment in which information is used or stored. Company operates through five main segments: Consumer, Security and Compliance, Storage and Server Management, Services, and Other.
Transitional period
On March 20th, 2014 Symantec Corporation (NASDAQ:SYMC) announced that its board of directors has appointed Michael Brown as interim president and chief executive officer, replacing Steve Bennett. A special committee of the board will immediately begin the search for a permanent CEO with the assistance of a leading executive search firm. Despite the hard transitional operating period, Symantec reiterated its guidance for the fourth quarter of FY 2014, which was previously provided on January 29th, 2014.
Valuation summary
[drizzle]Based on a recent share price, Symantec Corporation (NASDAQ:SYMC) had market capitalization of $14 billion. Company had net cash holdings of about $1.8 billion while enterprise value equaled $12.2 billion. Symantec is trading at an EV/EBITDA multiple of x6.9 based on FY 2013 full year results and an EV/EBITDA multiple of x7.3 based on the annualized results of first nine months of current fiscal year (FY 2014). During first nine months of current fiscal year (FY 2014), Symantec generated $649 million in free cash flow. During last three years (FY 2013-FY 2011), company generated an average annual free cash flow of $1,466 million which provides an attractive free cash flow yield of 10.5%. Company is also actively and steadily repurchases its shares: during first nine months of current fiscal year (FY 2014) it spent $375 million buying back shares and during last three years (FY 2013-FY 2011) it spent $864 million annually on average which represents a buyback yield of 6.2%. Symantec has an active share repurchase program in place and as of December 27, 2013 had $783 million authorized for repurchase.
Summary and conclusion
Shares of Symantec Corporation (NASDAQ:SYMC) significantly underperformed S&P 500 Index over the last 5 years: they returned only 36% compared a return of 103% on S&P 500. It is also worthwhile to note that while company had net cash holdings of $1.8 billion (after subtraction of the long-term debt), it ended the third quarter with cash and equivalents of $3.9 billion dollars. This amount represents approximately 28% of company’s current market capitalization, which is significant. Unconfirmed interest by activists or private equity firms, reasonable valuation and large amount of cash on the balance sheet, transitional operating period and expected hiring of a permanent CEO provide an interesting situation and warrant future research and follow-up on part of a thoughtful investor.
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