Is This Security Company Still a Buy at a 52-Week High?

Shares of Symantec (Nasdaq: SYMC  ) hit a 52-week high on Wednesday. Let's take a look at how it got there and see if clear skies are still in the forecast.

How it got here
It's been quite the turnaround for Symantec, which went from trading at a 52-week low to peaking at a 52-week high in just two months. Driving growth is a mixture of compelling valuation, and a spending boost from companies eager to build their businesses in the cloud.

In Symantec's first-quarter results released in July, the company reported 1% sales growth and a 7% rise in income in spite of a double-digit negative currency translation headwind. Symantec's management noted order strength across all of its business segments, including a big jump from its security and compliance segment.

Simply put, no trend offers Symantec a greater opportunity to expand than cloud-computing. Traditional security options offered by Juniper Networks (NYSE: JNPR  ) and Cisco Systems (Nasdaq: CSCO  ) , which are often built into networking hardware and are geared more toward traditional website models, respond less effectively to dynamic web-based social and cloud platforms. Symantec's Norton Antivirus, Intel's (Nasdaq: INTC  ) McAfee, and AVG Technologies' "freemium software" provide a wider base of protection, but require constant updates which can be a strain on the customer. That's why Symantec is modeling its next generation of security software closer to Palo Alto Networks (NYSE: PANW  ) , whose software is predominantly self-managing and geared toward cloud-based data center protection.

How it stacks up
Let's see how Symantec compares to its peers.

SYMC Chart

SYMC data by YCharts.

In spite of the fact that security software is a basic necessity to operating a network, security companies have performed rather poorly over the past five years.

Company

Price/Book

Price/Cash Flow

Forward P/E

5-Year Projected Growth Rate

Symantec 2.7 8.1 10.4 8.8%
Cisco Systems 2.0 9.2 9.2 7.9%
Juniper Networks 1.5 14.5 19.6 13.9%
Intel 2.4 5.8 9.4 11.9%
Palo Alto Networks 389.5 61.2 154.4 50.0%

Sources: Morningstar and Yahoo! Finance.

Let's play a game of "Which One Doesn't Belong?" If you said Palo Alto, you'd be correct, as the relatively young company is still growing by leaps and bounds at the expense of its profitability. However, I find it hard to argue with a five-year growth projection of 50% thanks to growth in the cloud.

McAfee has really struggled recently as Intel turns its attention to growing the hardware side of its cloud business, leaving its McAfee operations on cruise control. Although partnerships are being formed in the cloud and OEM arrangements still bring in good cash flow, McAfee's days as a premier security company may be waning.

Cisco and Juniper are gearing up to be hardware suppliers of choice for big data centers, but they'll likely take a back seat from a security development perspective.

Finally, Symantec offers perhaps the most compelling valuation of this group (next to Intel), even after its 50% run-up from its lows in July.

What's next
Now for the $64,000 question: What's next for Symantec? The answer depends on how seamlessly it can transition its business to take advantage of the boom in cloud spending, if it can keep its costs in check as it expands into the cloud, and whether the company institutes a quarterly dividend after having generated $1.7 billion in operating cash flow over the trailing-12-month period.

Our very own CAPS community gives the company a three-star rating (out of five), with 85.4% of members expecting it to outperform. This is one case where my timing was nearly perfect as my CAPScall of outperform is currently up 35 points since my selection in July.

You might think after the sharp rise in Symantec's valuation when combined with tepid revenue growth that I'd take my gains and run for the hills, but it's just the opposite. At only 10 times forward earnings, Symantec's valuation is still incredibly reasonable -- especially with potential for a dividend to be introduced. Symantec has legacy OEM agreements for its software on many PCs and laptops, and is beginning to work its way onto the cloud-computing scene. While its growth rates will never match that of Palo Alto (at least not anytime soon), it offers the right balance of value and growth to warrant a long-term hold.

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Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

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  • Report this Comment On September 13, 2012, at 11:59 AM, EducatedInvestor wrote:

    Fair opinions in the article but missing some critically important facts....

    - Symantec has been an absolute mess operationally and the new CEO has already identified and admitted as much, there is much broken process. And operational issues and redundancy and dozens of entrenched silos. A beaten-down culture and wide variety of other internal issues.

    - No matter how good the intentions, a company the size and complexity of Symantec cannot possibly be turned around in anything less that years. The CEO has already said if he elects to go his internal growth plan (which he almost certainly will) rather than split the company, then it will be a 2-3 slog. Translation: 3-5 years in actuality.

    - A dividend is due, but again, the company is not keen on this and even the CEO is already hinting it will be a mixture of value-return methods (which seems to imply a small diviend mixed with other prior actions such as buy-backs and acquisitions)

    - The company is loosing share in both security and storage to many smaller & more aggressive companies, it continues to loose share, and there is no reason to believe this can be stopped.

    - Corporate earnings are slowing amid a global economy that is not expected to do well any time soon, and to which Symantec is globally exposed.

    - The stock is not only at a 52 week high, it is at a 4-year historic high with the one exception of a few days over a year ago that was based on a lie (previous management fooling investors into thinking the company had finally turned around until things once again collapsed)

    - Symantec is severely behind in entering the necessary growth areas in a meaningful way (such as mobile and cloud). This is not something that can be made up, once behind, no matter the size of the company, it is very difficult to catch up again any time in the near or mid term.

    - Earnings have been bad, guidance lowered and we can probably expect this to continue for the next many quarters, especially with the slowing economy and internal disruption from changing management.

    Symantec had everything going for it 10 years ago but it is now in some real trouble. The fact there has been three CEO's over the previous 5 or so years is a testament to this, as is the stock price history.

    In closing, it is clear the stock is very likely overbought and overvalued right now. While I do agree the stock is a long term buy, a proper entry point would be in the 16-17 area and investors need to be prepared for a continued choppy ride over 3+ years before seeing any kind of major change & confirmation of execution and new direction that increases share price. Even the new CEO's comp package is heaivly weighted on price targets of 18/20/22 2-3 years out (through 2015) - a very telling sign in itself.

  • Report this Comment On September 14, 2012, at 12:39 AM, istockyou wrote:

    Symantec or PA networks need a make a move in two spaces, either gobble up Qualys as it hits the market here soon, or GOOD Technologies.

    SaaS Security for one and BYOD in the other space.

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