It is always a difficult task to note a CEO who should go, and it is even more difficult when you like the CEO and when you actually thought the diversification strategy was safer than being a pure-play on the volatile data security market. That is the conundrum we have in saying that John Thompson at Symantec Corporation (NASDAQ:SYMC) may need to drop the CEO title from his Chairman & CEO role. We actually like this CEO from everything we have seen out of him but we can’t ignore the facts and can’t ignore the perceptions and performance. We think that "more of the same" is going to ultimately lead shareholders wanting a new vision AND wanting new action leadership at Symantec.
Our digging around regarding management at Symantec has yielded mixed hearsay over recent months, so this opinion may be one of controversy and may still be a bit too preliminary. Thompson isn’t thought of as a dud. He was appointed by President Bush in 2002 to the National Infrastructure Advisory Committee and he holds a maters out of MIT. He’s chaired an effort to better secure the security and efficiency of national aviation. Prior to Symantec he climbed the ladder at IBM and rose through sales, marketing and software developer ranks to become general manager of IBM Americas. He’s also listed as being on the board of directors at both Seagate (NYSE:STX) and UPS (NYSE:UPS) and is chairman of the board for the Cyber Security Industry Alliance. If you own a PC or a new Mac, you’ve probably got the Norton security pre-installed on it.
Symantec completed the Veritas buyout on July 5, 2005 and on that dayshares were $21.88. They closed yesterday at $17.12, down roughly 21%over that two and a half year time period. Unfortunately when youcompare the performance to that of the NASDAQ 100 by measuring thePowerShares QQQ (NASDAQ:QQQQ), the 21% drop in Symantec compares to a40% gain in the QQQQ over the same period. As a reminder, we do notuse "lackluster stock performance" as the sole benchmark for calling aCEO out.
So if share performance isn’t the only metric for a CEO and if weactually like the CEO’s image, then why are we calling him out? Forstarters, Wall Street hated the change of strategy and still dislikesit. To us, the storage play and the data security play makes sense.But money talks and the money is against this merger even aftertwo-years. Activist shareholders, acquisitions, share buybacks, and asolid business environment have not been able to nudge the stock. Whennothing works shareholders go after management.
We think that the company has a built-in business growth model, albeita much slower growth than before. Wall Street analysts also feel thecompany will grow. Earnings are expected to grow 10% in 2008(technically March 2009 fiscal year-end) and revenues are expected togrow from roughly $5.8 Billion (estimate for fiscal march 2008) toroughly $6.1 Billion. Analysts still have an average price target justnorth of $23.00.
Before Symantec announced this transformational acquisition of Veritasits shares had been an incredible performer going from $10 in 2003 tonorth of $30 at the end of 2004. But when the company announced itstransformational deal shares fell almost instantly to under $25.00.The sad thing is that Symantec stock has never recovered.
Thompson isn’t a CEO that likes to announce massive layoffs either.That makes us like him as a would-be employer instead of a companywhere you have to be a lion hunter day in and day out, but Wall Streethas been very critical that the Veritas (and more buyouts) won’t bringcost cutting initiatives.
Analysts were also not that much in support of the $830 million (net ofcash) acquisition of Altiris. That was announced on January 29, 2007when shares were at $17.52 and when it received anti-trust clearance onMarch 8 shares were down at $16.57. Even though shares went over$20.00 in summer and then again in October, it just hasn’t been able tomaintain it. The $350 million buyout of Vontu may ultimately pay off instorage and access security but hasn’t been material as of yet.
Its share repurchase programs have also failed to capture the heart ofWall Street, and the company did this at the beginning of a wave in2006 when Wall Street was rewarding for leveraging the books. In Juneof this year the company announced a new $2 Billion share repurchaseplan and it had announced a $1 Billion share buyback plan in January2007, but those efforts have also failed to propel shares.
Symantec has previously been the subject of activist investors likeCarl Icahn and in a tighter liquidity market ahead of a recession thathasn’t yet happened we aren’t confident that any new leveraging of thebooks will be greeted with open arms. The company looks ripe for anactivist investor to come on much stronger in 2008.
If things stay the same in 2008 as they have in 2007 and 2006 and 2005,we feel that shareholders are going to begin a stronger revolt and willstart for blood by the middle to end of 2008.
The stock is actually cheap by most metrics and even with a $15 Billionmarket cap could arguably appear on any value stock investor screens.Any new team might be able to step in and with some new initiatives andsome belt tightening might be able to make the argument that Symantecshould trade higher than 14.5-times March-2008 earnings projections andhigher than 13.4-times March 2009 earnings projections. The companycould even try a one-time dividend and a new dividend strategy ahead.
It isn’t too late for Thompson and we think there is a real shot thathe’s be more valuable to keep as Chairman with a new CEO rather thanan outright revolution. We’d think Wall Street would also like him to remain on as Chairman for some oversight, contacts, and knowledge. Unfortunately, we actually like this CEO andthis was by far the most difficult call to personally make out of our10 CEO’s TO GO FOR 2008. But Wall Street can be a rough neighborhoodand investors are likely running very thin on patience.
Jon C. Ogg
December 12, 2007
Jon Ogg can be reached at email@example.com; he does not own securities in the companies he covers.