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07/17/17 10:00:06 AM



This week's Focus Stock of the Week is Symantec (SYMC $30), which carries CFRA's highest investment recommendation of 5-STARS, or Strong Buy. We upgraded our opinion on SYMC to Strong Buy from Hold, on June 12, after a notable decline in the shares. We think stock price reflects concerns related to quarterly results posted in May and longer-term worries about growth and execution. However, we see considerable potential for improving fundamentals and performance, especially in light of corporate transactions and management changes completed since the beginning last year.

Digital attacks on entities are increasing in terms of volume and sophistication. One in 131 e-mails is malicious, up from one in 220 last year, according to Symantec. The recent WannaCry ransomware spread to 150 different countries. According to Symantec, 689 million people around the world were victims of cybercrime last year, and every 2 seconds someone is victimized by identity theft.

Accordingly, demand for company and consumer digital security solutions is high and increasing, as more and more important data, information, content, applications and even infrastructure move online and to mobile, often enabled by cloud computing. Symantec, through a variety of offerings, addresses these needs.

The company has estimated the total addressable markets (TAM) for its products and services at $75 billion - $65 billion for enterprise security and $10 billion for consumer digital safety - with projected growth of 7% to 9% each. Symantec generated $4.0 billion in revenue in FY 17 (Mar.).

Symantec has undergone a transformation since the beginning of last year. In January 2016, it sold Veritas, an information management and storage business for around $7.0 billion in consideration. In February 2016, the company announced technology-focused private equity firm Silver Lake would make a $500 million investment and be represented on the board of directors.

In August 2016, the company bought Blue Coat, a provider of advanced web security solutions for global enterprises and government, for $4.7 billion. In February 2017, Symantec acquired LifeLock, a provider of proactive identity theft protection services for consumers and consumer risk management services for enterprises, for $2.3 billion.

Essentially, over roughly a year, Symantec exchanged a storage business in Veritas with limited growth prospects and strategic value, for enterprise security and consumer safety businesses Blue Coat and LifeLock with stronger growth opportunities and notable synergistic potential.

Since those transactions were completed, Symantec also has made some smaller acquisitions, including Fireglass, a provider of "browser isolation" software (which eliminates ransomware, malware and phishing threats in real-time by preventing potentially harmful content from reaching users or corporate networks), and Skycure, a leader in mobile threat defense.

Also, in March 2017, the company announced Symantec Ventures to identify and invest in emerging and important cybersecurity trends and companies.

In FY 17, Enterprise Security accounted for 59% of revenues and Consumer Digital Safety (formerly Consumer Security) contributed 41%. This compares to FY 16, when Consumer Security accounted for 46% of revenues, with Enterprise Security generating 54%. In FY 15 (Mar.), prior to the sale of Veritas, the Consumer Security segment accounted for 29% of revenues, Enterprise Security contributed 32% and the Information Management unit accounted for 39%.

FY 16 (Mar.) revenues fell 45%, following the Veritas sale. They rose 16% in FY 17, and we see increases of 24% in FY 18 and 6% in FY 19, reflecting the acquisitions of Blue Coat and LifeLock.

We note prior challenges related to demand and competition, but also efforts to develop and deliver new more comprehensive security offerings, drawing on existing assets and focusing on threat protection, information protection, cybersecurity services and analytics offerings. Cross-selling is another opportunity.

We see gross margins to FY 19 at around the 84% to 85% level seen since FY 13. EBITDA margins widened notably in FY 16 and FY 17 with the Veritas sale and restructuring efforts, but we see a narrowing in FY 18, given continuing investment and the purchases of Blue Coat and LifeLock, and then significant gains in FY 19 in FY 20.

Most of Symantec's c-level executives and much of the management team are relatively new to the company, coming from Blue Coat, including CEO Greg Clark and President and COO Michael Fey. We have noted better focus, more aggressive investment, and more consistent execution from these executives over the past year, compared with what we noted previously from the company.

Our 12-month target price is $36. Peers recently had a median forward P/E of 19.9X and a P/E-to-growth ratio of 2.0. Using these multiples and averaging the outputs resulted in our target. We project EPS of $1.78 for FY 18, rising to $2.02 in FY 19.

Risks to our recommendation and target price include the potential for sustained weakness in enterprise IT spending, and issues related to the purchases of Blue Coat and/or LifeLock.

CFRA's views on stocks are constantly re-evaluated. Please refer to our most recent publication on this stock to see our current view.


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