Buying a stock just because you think it might be a bid target is always a bad idea. Most rumoured deals never occur – many are invented by speculators hoping for a quick buck. I only ever buy a share based on its merits, attractive valuation and organic growth prospects. Being an acquisition target is just icing on the cake.
Take Symantec. It’s the world’s largest independent vendor of security, authentication and storage software. It has three flagship brands. First, there’s the Norton anti-virus computer application that protects PCs, servers and mobile phones against internet worms, spam and cyber-crime. Second, there’s its recently purchased (for $1.3bn) Verisign Trust product. This certifies websites, enabling users to confidently and safely purchase goods online without fear of being fleeced. Third, there’s its IT backup software (Veritas) which allows companies to securely and efficiently archive, restore and manage important data.
The group’s main rivals are EMC in storage, and McAfee in anti-virus protection. The latter was recently bought by Intel for $7.7bn in cash. That’s equivalent to take-out multiples of more than three times sales and 13 times adjusted EBITA.
And Symantec could be the next in the cross-hairs. There’s plenty of growth left in the internet security sector. Sure, most of the billion-odd computers in the world presently have some form of anti-virus software. But by 2020, there could be another 50 billion internet-connected gadgets – from mobile phones to industrial machines to cash points. Nearly all will need protection from cyber-crime.
Symantec (Nasdaq: SYMC), rated a BUY by Stifel Nicolaus
Indeed, just last week, the UK Government Communications Headquarters (GCHQ) – probably one of the most well-defended places on earth – complained that cyber-attacks were surging at an annual rate of 60%. GCHQ director Iain Lobban revealed that public-sector computer networks receive 20,000 malicious emails a month, of which 1,000 deliberately target critical infrastructure networks. He added that thousands of stolen UK credit-card details were available for sale online in hacking forums for about $2 per set.And combating e-fraud is just part of the growth story. Veritas also enjoys good prospects, driven by the internet’s ongoing development together with the world’s exploding data requirements.
Wall Street expects 2010 sales and underlying operating profits (EBITA) of $6bn and $1.5bn respectively, rising to $6.3bn and $1.6bn in 2011. The firm also spins off a phenomenal $2bn a year in free cash flow, which should leave the balance sheet largely ungeared by March 2011. On this basis, I would value Symantec on a ten times EBITA multiple, delivering an intrinsic worth of $18.50 a share. And if the company was taken over – which seems likely at some point, say by Dell, IBM or Microsoft – then I believe the exit price would be north of $24.
The stock is not risk free, of course. The main uncertainties include current order weakness due to customers taking longer to commit to big new contracts; competitive pressures; and foreign-exchange considerations for UK investors. But with excellent cash generation on top of solid, contracted revenues, Symantec is a nice play on the rise in cyber-crime. Second quarter figures are out on 27 October. Stifel has a $19 price target.
Recommendation: Buy at $15.60
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments