Higher Margins Would Benefit Symantec Corporation (SYMC)


Symantec Corporation (NASDAQ:SYMC)’s earnings failed to meet expectations in three of the four quarters last year. The last quarter earnings, as well as, top line came in above the expectations of the Wall Street. The outlook provided by the company was also in line with the estimations. Above all, there is an expectation that the company could benefit from higher margins. The company is a leader in endpoint security with the threat increasing as rapidly as it can. The security firm is currently focusing on four priority areas. The first one was to realize its unified security tactics while the second was in respect of building its enterprise security sales pipeline/GTM. The third and fourth priorities were improving its cost structure and efficiently managing the capital. The company is also getting money to create an advanced security platform. All of a sudden, the shares of the company have become important to watched. The current year could see things if everything goes according to its plan.

Consumer Security Products Line

One of the issues that Symantec Corporation (NASDAQ:SYMC) had to face was the consumer security product line as it was considered a weakness. However, things are not likely to remain in the same perspective in the upcoming months. There appears to one thing certain that this segment will not likely have bad things or only fewer bad things even if it meant that things will not be better. That was partly because of the feeling among the investors that consumer drop could moderate. In the fiscal year 2015, the division witnessed a drop of 7%.

According to the RBC Capital Markets analyst, Mathew Hedberg, the drop in the division was the fall in re-activation of the auto-renewal option of Symantec Corporation (NASDAQ:SYMC). Hedberg said that he was confident that it would happen in the current month in the United States. Similarly, the analyst believes that it would happen later in the summer in the European Union. The company has also been involved in reaching agreements with telecom companies in Japan, German, and India. That should help to grow in the on-line channel while expecting flat average selling prices (ASP). The company also has a good chance of grabbing an OEM contract from one of the biggest PC makers, which comes up for bid in March-end. There was a belief that the security service provider would take the deal without hurting its margins. That means it should be an advantageous one. Also, the reports indicated that the trends of consumer billings were positive until now, and that is a good sign for revenue generation.

Lower Costs To Boost Profit

Another area for Symantec Corporation (NASDAQ:SYMC) to earn an advantage was the realization of the better margins in the upcoming quarters. There appears to be enough room to reduce costs for the upcoming fiscal year 2017 thus lifting the profitability. On a comparable basis, margins might drop two percentage points because of the Veritas Infrastructure, which was divested recently. RBC Capital expects margins to trend higher throughout the fiscal year 2017 close to 30% and enter the following year with 30%. The company is likely to gain $400 million from some identified cost savings, and half of it should allow margins to reach 30% level while the remaining half might indicate reinvestment or additional leverage.

Symantec Corporation (NASDAQ:SYMC) stands to gain from cost cutting measures by higher margins. According to estimation, for every $100 million reductions in operational expenditures, the company could add earnings of nearly 13 cents a share in the fiscal year 2018. That means the security service provider might gain a maximum of 52 cents a share when it realizes $400 million from cost reduction measures. That also meant that for every quarter, its earnings could add 13 cents a share. The company would have also spent enough time in reviewing its operations following the divestiture of Veritas, as well as, the alliance with AlixPartners and Silver Lake Partners.

Capital Return Program

There is the potential for merger and acquisitions for Symantec Corporation (NASDAQ:SYMC) following the sale of its Veritas divestments. Its CEO, Michael Brown, indicated before the closure of the sale that it was planning to focus on information and threat protection apart from the cyber security services. He gave hints that it was the area where the company could probe any acquisitions. The CEO was categorical that it was not looking into any other areas for M&A. However, he expressed his concerns about the pricing of the technology firms currently, which, he termed it, as expensive. The company could afford to spend its money only once.

Therefore, Symantec Corporation (NASDAQ:SYMC) appears to have kept the M&A on the sidelines, at least, for the time being. That was because the company decided to use the money from the sale of Veritas for its capital return program, which would be completed before the fiscal year 2017 ends. According to its plan, it would pay a special dividend of $4 a share costing $2.7 billion to the company’s exchequer. The remaining $2.3 billion would be used to buy back its shares. The company has also received a $500 million investment from Silver Lake Partners, as well as, AlixPartners.

Valuation

As far as valuation for Symantec Corporation (NASDAQ:SYMC), the stock is trading cheap in terms of price to earnings, price to book and price to sales ratios compared to the industry average. For instance, its PE for the trailing twelve-month period was 12.4 times whereas the industry average was 87.1. Similarly, its price to book was 2.2 times compared to the industry’s 4.9 times while price to sales was only 2.0 times versus 4.5 times for the industry average. Its return on assets, and equity were 4.9% and 11.0% compared to the industry average of 2.7% and 5.3% respectively. It was because of such reasons; brokerages like RBC have a price target of $23.

Conclusion

Symantec Corporation (NASDAQ:SYMC) appears to be on a strong path to deliver better performance in the upcoming quarters. There is potential for upside rewards. The valuation supports while margin expansion would add further value.

Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

Viraj Shah

Viraj Shah has completed M.Com (Finance) and is currently pursuing his CFP. He tracks US markets along with other global markets like India very closely. He is very passionate about stocks, real estate, and technology. He also believes that money can always be made in the market.

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