The Trade: Symantec Corp (NSDQ: SYMC)—Buy < 17.50.
Why Now: In these uncertain times, the reliable cash flow produced Symantec Corp’s consumer segment should set the stock apart from other technology names. We expect the company to benefit in the near term from the launch of its Norton One service. Over the long term, the stock offers exposure to rising demand for Internet security among corporate and individual users.
Elliott shuts down his computer and packs up his belongings to head home for dinner. The Greek national anthem plays on his phone, which can only mean one thing: Yiannis is calling to talk shop.
Elliott: You again? I’m finished working for the day. I need a break from the market.
Yiannis: I know the feeling. You want to meet downtown for dinner?
Elliott: Let me guess, Café Milano?
Yiannis: Well done. If only the markets were as predictable as my eating habits…
Elliott: Yes, if only the EU were as predictable as your eating habits.
Yiannis: See you in Georgetown in 30 minutes?
Elliott: Sure, but you’re paying for this meal.
Elliott arrives at Café Milano, where he find Yiannis drinking champagne.
Elliott: What are we celebrating?
Yiannis: Nothing. I thought some champagne would lift my spirits. As Napoleon once said, champagne goes well with victory and defeat.
Elliott: That’s what he said?
Yiannis: Something to that effect–I wasn’t there.
Elliott: I’ll drink to that. Pour me one!
Yiannis: The waiter will oblige you, I’m sure.
Elliott: I know what will snap you out of this funk: We need to figure out our pick for the next issue of Cocktail Stocks.
Yiannis: I was thinking about that earlier today…
Elliott: And you have a brilliant idea!
Yiannis: I have two ideas–the stocks we discussed a few days ago. But I can’t stop thinking about our picks over the past few months. It’s been a difficult market.
Elliott: True. Our speculative picks haven’t fared well amid all the uncertainty in Europe, and we should have booked profits on some others when we had the chance.
Yiannis: The market’s recent strength has been somewhat encouraging.
The waiter arrives to take the stock-pickers’ orders.
Elliott: I’ll have the swordfish steak.
Yiannis: I’d like the Risotto Armani and a cheese plate for the table.
Waiter: Sir, the cheese plate is no longer on the menu.
Yiannis: Ah, more uncertainty. Perhaps you can make it happen for me.
Waiter: I’ll look into it.
Elliott: Always so demanding.
Yiannis: This is how it should be.
The cheese plate arrives, but neither Elliott nor Yiannis makes a move to eat any.
Yiannis: I was working on my economic outlook for 2012 before dinner. I expect slower economic growth and lots of uncertainty. The EU needs political solutions to its problems, while the US won’t address its issues until after the upcoming presidential election.
Elliott: Looks like the US and Asia will have to do the heavy lifting in 2012.
Yiannis: Barring a meltdown in Europe, global gross domestic product could exceed 3 percent in 2012, with the US and Asia leading the way.
Elliott: I’m going to put you on the spot: Of the two stocks we discussed last week, which one is best for Cocktail Stocks? I know which one I’d pick.
Yiannis notices the cheese plate and pulls it to his side of the table. Just then, the waiter arrives with the entrees and a peeved look.
Waiter: Glad to see you enjoyed the cheese plate.
Yiannis: It’s a work in progress.
Elliott: No more stalling. What’s your call?
Yiannis: I like Symantec Corp (NSDQ: SYMC) because cybersecurity is a secular growth trend that will remain in play through bull and bear markets. The firm is also one of the biggest players in this space and has a bright future.
Elliott: We’re on the same page. The resilience of Symantec’s consumer business, which accounts for about 32 percent of the firm’s annual revenue, is a welcome advantage in these uncertain times.
Yiannis: The company’s popular Norton brand of security solutions includes antivirus software, as well as products that detect malware and thwart attempts to steal data from computers and home networks. Symantec’s online backup service holds about 13 million customers’ data, and the company has launched a suite of products for mobile devices such as smartphones and tablet computers.
Internet security is of increasing concern to consumers. With more individuals shopping, banking and paying bills online, criminals have grown more innovative in their attempts to access and exploit sensitive information. Internet security software has become a necessity, not a luxury. Symantec’s results show that even when the economy weakens, PC users are willing to spend money to secure their data against cybercrime.
Consumers usually sign up for the Norton suite of products online and agree to automatically renew their subscription each year via a credit or debit card. This structure guarantees that users have the latest updates and features, while these auto-renewals generate a steady stream of recurring income and yield robust profit margins.
Elliott: Reliable cash flow is one thing, but what about growth?
Yiannis: Symantec is also a growth story. The firm’s consumer segment has plenty of scope to increase its revenue in coming years. For example, the company can ink additional distribution agreements with original equipment manufacturers (OEMs) to pre-install free trials of Norton products on new PCs.
In the most recent quarter, Symantec signed 20 new deals with OEMs, including an arrangement with Samsung Electronics (Seoul: 005930) to install Norton Internet Security and Norton Online Backup software on all the company’s laptop and notebook computers. Customers who buy these PCs can register for a free trial of Norton’s services, during which they will receive frequent reminders to purchase an annual subscription. These agreements enable the firm to grow its customer base.
Elliott: Don’t forget about the launch of Norton One in early 2012. This innovative product protects PCs, Macs and smartphones–all of the devices in a single household–under one subscription that can be managed through a single interface. Meanwhile, the free-trial version of the company’s Mobile Security software, which protects smartphones from theft and malware, averages more than 170,000 downloads per month. Rising demand for security solutions among users of web-enabled mobile devices should be a boon to revenue growth in coming years.
Yiannis: Symantec’s storage and server management business is no slouch, either. This division accounts for about 37 percent of the firm’s annual revenue and yields profit margins of roughly 40 percent.
Elliott: Got to love those margins.
Yiannis: This business segment provides software solutions that back up and archive data on corporate networks, allowing crucial information to be recovered in the event of a system failure.
Symantec also offers software and appliances that help large companies to manage their storage infrastructure. The volume of data collected and stored on enterprise networks is growing at an exponential rate, forcing companies to optimize their existing systems. Symantec’s deduplication software identifies and removes redundant data to free up capacity. The company’s software works across multiple platforms, though a good chunk of its revenue is tied to Oracle’s (NSDQ: ORCL) hardware.
Symantec’s storage business faces competition from the likes of EMC Corp (NYSE: EMC), but the company’s well-regarded products, installed base and renewed focus on small and midsize enterprises should enable the firm to maintain its share of a growing market.
Elliott: Thanks for the overview. You really did your homework on this one. But you left out Symantec’s security and compliance business segment, which provides a long list of critical security solutions and services to enterprise customers. These products include solutions that authenticate users, protect e-mail servers, encrypt data and provide security for corporate websites.
Enterprise’s digital security needs have grown in complexity, as the frequency of attacks on corporate systems has increased. In addition, corporate users no longer need to secure just a handful of desktop PCs; laptops, tablet computers and smartphones must also be protected outside the office. The compliance business helps companies to enforce corporate rules regarding the use of IT systems. In addition, Symantec can help corporations ensure they’re in compliance with the law and best practices regarding data security
Yiannis: Symantec’s security and compliance business offers its software as a surface.
In the past, companies purchased software licenses from a vendor and installed the software on individual computers within the organization. Any periodic software updates or enhancements would need to be downloaded and installed on each individual computer or system.
Symantec hosts its enterprise-security software remotely, and customers access these programs via the Internet for a recurring monthly, annual or quarterly fee. This approach cuts customers’ costs, as they no longer need to store, maintain and update this software on their own.
Elliott: You’ve covered the business, but what about recent results?
Yiannis: In the fiscal second quarter ended Sept. 30, 2011, Symantec’s revenue increased 14 percent from year-ago levels. Symantec derives a little more than half its revenue outside the US; on a constant-currency basis, sales were up 9 percent, fueled by 3 percent organic growth and assets recently acquired from Verisign (NSDQ: VRSN).
All three operating segments posted solid organic revenue growth during Symantec’s fiscal second quarter, with the consumer and security and compliance divisions leading the way.
Elliott: I like the stock because Symantec generates about 65 percent to 75 percent of its quarterly revenue from contracts that automatically renew. That makes the company one of the best defensive-growth plays in the technology sector.
In addition, consumers and businesses tend to regard Internet security as a necessity because the consequences of data theft can be severe.
Yiannis: True. But the stock isn’t without risk. A global slowdown in new PC sales would take a bite out of revenue growth, and the firm’s data storage solutions face increased competition.
Elliott: The stock trades at less than nine times analysts’ consensus fiscal 2012 earnings estimate, an undemanding valuation. The stock also has solid support around $15, limiting downside risk. As fears of a global economic slowdown abate, the stock could breach its 2011 high of $20.50.
Yiannis: It’s settled. Symantec Corp is a buy under 17.50. You’re picking up the tab on this meal, right?
Updates on Open Positions
August 2010: Vale (NYSE: VALE)–Buy < 30
Although commodities prices will moderate if the global economy slows, blue-chip miners are the place to be for a potential turnaround. Spot prices of iron ore have tumbled recently because of weak demand in Europe. Nevertheless, Vale’s long-term growth story remains intact, though it may take a few quarters for demand to strengthen in China.
September 2010: Teekay Tankers (NYSE: TNK)–Buy < 10
A 21 percent yield is Teekay Tankers’ only saving grace. We have been in this trade long enough that all the bad news has been priced into the stock–including lower day-rates on the spot market in 2012.
November 2010: True Blue (NYSE: TBI)–Buy < 15
Our investment thesis for TBI remains intact. Part-time employees will account for a greater proportion of the US labor market. This high-beta stock should spike once it becomes clear the US economy will avoid recession. The company’s business continues to strengthen, as indicated by new contracts and stronger US employment numbers.
February 2011: ProShares UltraShort 20+ Year Treasury (NYSE: TBT)–Buy < 30
Betting against US Treasury notes has been a losing proposition. This position could recover some lost ground when investors rotate funds from safe havens to equities, which should happen sooner rather than later.
May 2011: TAL International (NYSE: TAL)–Buy < 32
TAL International is the top company in the shipping industry, and the stock will rally if global trade doesn’t collapse. Demand has remained fairly resilient, though container prices have declined. We continue to monitor the situation closely.
June 2011: iShares MSCI Italy Index (NYSE: EWI)–Buy < 15
This play on Europe’s turnaround is less risky than our Greece-related bet. The Greek experiment has forced the EU to deal more decisively with Italy’s fiscal challenges. Italian equities could rally once the country’s financial situation stabilizes.
July 2011: TransGlobe Energy Corp (NSDQ: TGA)–Buy < 12
This small-cap oil producer has pulled back amid concerns that an economic slowdown will weigh on energy demand and prices. This speculative stock tends to outperform bull markets and underperform in bear markets.
July 2011: Market Vectors Gulf States Index (NYSE: MES)–Buy < 23.50
This exchange-traded fund has held its own since we featured it in the July issue, especially given the performance in the global markets over the same time frame. We’re holding out for a powerful upsurge.
August 2011: National Bank of Greece (NYSE: NBG)–Buy < USD6
This stock is our most speculative play to date and is only appropriate for aggressive investors who can stomach a bet that’s based solely on a turnaround in Greece. A resolution to Greece’s sovereign-debt crisis is far from a foregone conclusion, though steps are being made to the right direction.
September 2011: China Cord Blood Corp (NYSE: CO)–Buy < 4
Don’t let near-term volatility shake you out of this stock; this bet will pay off over the longer term.
October 2011: Infosys (NSDQ: INFY)–Buy < 55
Shares of Infosys could rally even further if the stock market finishes the year on a high note. Investors should adhere to our buy target and only add to their positions when the stock dips below 55.
November 2011: Melco Crown Entertainment (NSDQ: MPEL)–Buy < 12.75
This casino and hotel operator remains the best way to gain exposure to lucrative gaming market in Macau. Melco Crown Entertainment will list shares in Hong Kong before year end. The firm has USD1 billion in cash on its balance sheet, and estimates calls for the firm to generate USD600 million in operating cash flow next year.