Potential buyout targets are the Holy Grail of short term investing. Even the rumor of a company being a target can cause a significant jump in the stock price. That jump, in turn, can result in an even higher eventual bid for the stock, should one eventually come. This dynamic is even more pronounced when there are said to be multiple entities looking at a possible takeover as competition drives pricing to the limit. It was with great interest, therefore, that I read this report yesterday afternoon that Symantec (SYMC) is said to be on several firms’ radars.
There is, however, another way of looking at the news. If it is true and SYMC is being considered both by private equity firms and, according to the original Reuters report, possibly by firms such as NetApp (NTAP) and IBM (IBM) then it means that others, including people very good at assessing a company’s worth, perceive value in the stock at slightly higher than the current price. I believe that is the case, and even if no buyout actually materializes SYMC is still a decent buy around here.
Of course, no stock loses a third of its value, as SYMC did between August 8th and March 21st, without good reason. Growth at the internet security company best known for the Norton Antivirus products stopped and turned negative last year. This was partly down to the well known fall in PC sales, but is more accurately attributable to the company’s failure to get in front of the mobile revolution. When CEO Steve Bennett was summarily fired last month it gave the impression of a company in turmoil and the stock took yet another pounding.
Since then SYMC has shown signs of recovering and is actually up about 17% from last month’s low. It is tempting to say that this is down to one of those potential buyers initiating a stake or the possibility of a takeover being a badly kept secret on the street, but it could be something simpler... old fashioned fundamentals.
Even after the last couple of weeks’ rally, SYMC is trading at under thirteen times forward earnings. This is cheap compared to the S&P average, but in the tech sector, where multiples are typically higher, it is at fire sale levels. “So what,” you may say, “If the company is in freefall, then shouldn’t it be cheap?” If “freefall” were the case, then I would agree with you, but while Symantec has definitely been struggling it is hardly on the verge of collapse.
Indeed, if we look at the revenue and EPS numbers, we can see that earnings have actually been growing over the last year, and have beaten expectations handily in each of the last four quarters. SYMC will report again on May 8th and if they once again beat current earnings estimates of $0.38 per share it would represent a significant increase on last year’s earnings. At these levels the stock also pays around a 3% dividend, so you will be paid if you have to wait for a move up.
From a larger perspective you could say that now is not the time to be buying any tech stock given the recent market turmoil, but really it is exactly the time to do so. Remember, the idea is to buy low and sell high, not the other way around. There is also a decent chance that the publicity surrounding the Heartbleed virus will push more consumers globally to update or upgrade their internet security and Norton, as a leading brand, would undoubtedly benefit from that.
It could be that the current rumors of predators circling around Symantec are just that, rumors. Even so, there could still be some upside left as more of the same surface. If they turn out to be true, then a reasonable short term profit could be made. If not, then there will no doubt be a drop back. In that case you would own stock in a company that has grown earnings compared to last year and consistently beaten analysts’ expectations at a forward P/E that represents a significant discount to the broader market. Buyout or not, SYMC looks like a reasonable bet to me.