Why Symantec’s Warning Is Good (SYMC)

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Symantec Corporation (NASDAQ: SYMC) is a stock that is about as routine as the sun… It is rises in the east and sets in the west.  The east would be any time its gets under $15.00 and the west would be any time it gets close to $20.00.  The drop of 11.3% to $16.02 makes this the worst of the NASDAQ 100 technology names today.  If you are an investor who did not own Symantec before, today’s drop should be considered as good news.

The company warned that it has missed some orders in the most recent quarter.  The security and storage software giant now sees revenue of about $1.68 billion versus its prior forecast of $1.72 to $1.73 billion and versus a Thomson Reuters consensus of $1.73 billion.  Earnings will now be about $0.38 EPS outside of items, shy of the range previously offered of $0.41 to $0.42 EPS and versus a Thomson Reuters consensus of $0.42 EPS.

Perhaps the delay in orders is more accurate than the large drop in the shares may indicate.  Symantec’s deferred revenue is now expected around $3.97 billion rather than the prior range of $3.91 to $3.93 billion.

We did say that there is good news for those who were considering Symantec but who had not yet decided to buy the stock…

If you go back through time to shortly after the Veritas acquisition, Symantec has traded in a very tight trading range that has only been violated a few times.  As Symantec gets closer to $15 and lower than $15, it is a buy.  As it gets closer and closer to $20 per share, it is a sell.  Yesterday the stock was in a technical no-man’s land at $18.07, but now the stock is down 11.3% at $16.02 in late afternoon trading.

Symantec looks somewhat cheap or at least not expensive if you choose to take the company at face value and trust that the deferred revenue will hold true.  If the orders are truly deferred rather than at-risk, then the estimates of $1.79 EPS and $7.03 billion in sales for Fiscal March-2013 generate forward multiples of almost 9-times on earnings and only about 1.7-times sales.

Symantec also has one other flaw that it could easily remediate: it pays no dividend.  The company unveiled a new $1 billion buyback one quarter ago, but frankly we would rather see it scale down its debt more than buying its stock.  At some point the company needs to capitulate and pay a dividend.  Today’s earnings and sales warning is not so egregious that it would interfere with a 1.5% to 2% dividend yield in any meaningful way.

It is fair to say that $16 is NOT the same as almost $15 and we would never recommend any piling-in effort on the day of a gap-down just because of historical price patterns.  In fact, it would not really be normal for a large gap-down on an earnings warning to be the exact bottom.  There is always a risk that the company’s relevance could fade or that key management changes might work against it.  That being said, investors should put this one on a long-term watch list and give this one a closer look if the market drags it down further.

Symantec’s 52-week range is $14.94 to $20.50.