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Why Symantec Stock Dropped 13% Today

By Rich Smith – Jul 15, 2019 at 5:21AM

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An acquisition bid falls through.

What happened

Shares of security software maker Symantec (GEN) surged almost 14% earlier this month after it was revealed that chipmaker Broadcom (AVGO) had begun talks to acquire the company. Today, Symantec is giving back most of those gains -- down 13.3% as of 10:10 AM EDT -- and Broadcom stock is rising a bit following news that no merger will happen after all.

So what

This morning, CNBC reported that Symantec and Broadcom "have ceased deal negotiations," and Broadcom is walking away, miffed that Symantec would not accept an offer of anything less than $28 a share.

Falling stock chart superimposed over columns of blue numbers on a black background

Image source: Getty Images.

Now, one way of looking at this is that because Symantec management thinks its stock is worth $28 a share, investors should put a pin in this price, and assume the company will eventually sell itself to someone willing to pay $28. Today, however, investors are going in the other direction.

Since Symantec shares never broke higher than even $26 after the merger talks were revealed, and management's price is now known to be $28, investors appear to be concluding that no deal will happen -- with anyone, at any price, at least anytime soon.

Now what

So how bad is this news for shareholders?

Bad enough. With minimal reported earnings under generally accepted accounting principles (GAAP), Symantec stock looks rather expensive at a trailing price-to-earnings ratio of 510.

Granted, free cash flow at the company runs considerably stronger than reported profit -- $1.3 billion over the past 12 months. But even so, shares trade at a valuation of 12.2 times free cash flow, with only a 7% growth rate, a modest 1.2% dividend yield, and a rather high debt load of $2.4 billion net of cash.

That's a fairly high price to pay for such slow growth -- for Broadcom it's now clear, and for individual investors as well.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool recommends Broadcom Ltd. The Motley Fool has a disclosure policy.

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