Symantec Overview

March 9th, 2005 - Copyright by Morris Rosenthal - - contact info

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Trading Notes

Copyright 2005 by Morris Rosenthal

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Notes on trading SYMC stock for investing in my SEP

Symantec Corporation is the main American play in computer security stocks. The corporate version of their Norton AntiVirus software is very popular with IT managers across the boards, but they have plenty of competition in the consumer sector from upstart Eastern European companies that win market share with free entry-level versions of their products. Consumer products accounted for 47% of their 2004 revenue. Computer Security stocks trade on news as much as fundamentals, or at least it seemed so in the past. Anytime a major virus or worm threat came along and proved how bad all of the software was, people would rush to buy the stocks on the assumption that everybody would buy more security products. Symantec does a very good job bundling trial versions of their software with new PC purchases, so after the trial period (I think mine was 90 days), customers would sign up to pay a yearly fee.

Symantec revenue was $1.87 billion in 2004, and they booked $971 million in deferred revenue. The company ended the year with $2.4 billion in cash, "thanks" in part to employees exercising stock options, though I'm lost as how they can present that as a positive. Analysts expect SYMC's earnings to grow like crazy going forward. If they're right in estimating earnings of around $1.00 for FY 2006, than the stock is trading at a forward P/E (if you believe in such things) of around 20, or relatively cheap for a growth company. The current P/E is just under 30 times earnings, which must prove Symantec is a growth company. Institutional investors own over 80% of the shares, and the book value is about $5/share, or around a quarter of the stock price. MacAfee used to be a major competitor to Symantec, but their revenue actually shrank 10% last year, compared to almost 33% growth for Symantec. Symantec's basic gross margin was 82% for the third year running.

Symantec spent $90 million in 2004 on acquiring product rights, including some deals related to patent litigation. R&D expenses were just over a quarter of a billion dollars, or 13% of revenue, sales and marketing came to almost $661 million, or 35% of revenues, while overhead was just under $95 million, or 5%. They list all sorts of risks in their annual report, I suppose the litigation risk bothers me the most because I understand it the least. In any case, I bought 100 shares this morning for the SEP trading experiment, so we'll see what happens.

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