Such investigations “almost never finish completely without issue” wrote one analyst, as stock plunges -34%
By Emily Bary
Like a computer virus, the bad news for Symantec Corp. (NASDAQ: SYMC) investors came all at once.
Shares of the cybersecurity software company plunged 35% in Friday morning trading to put them on track for their biggest one-day decline in 17 years and second-biggest loss in 29 years as a public company. The move came after management said late Thursday that the company’s audit committee was conducting an internal investigation into claims made by a former employee. Also hurting matters was that Symantec SYMC, -33.10% issued a weaker-than-expected forecast for the current fiscal year and quarter.
At least five analysts downgraded their ratings on Symantec’s stock, according to FactSet, and MarketWatch counted one more who was not in FactSet’s database. Just four of the 30 analysts who cover the stock rate it a buy, while 23 rate it a hold and three call it a sell, according to FactSet.
“The fog created by an internal investigation of the company led by the audit committee of the board, with no semblance of detail provided to investors, overshadows everything else in Thursday’s Q4 and FY 2018 earnings,” wrote BTIG analyst Joel Fishbein, who downgraded the stock to neutral from buy. He was troubled by the fact that Symantec canceled analyst call backs and declined to take questions during the company’s earnings call.
Fishbein also pointed to the company’s lower-than-expected quarterly and annual outlook, which came as somewhat of a surprise to him given that Symantec seemed to be making some progress with the enterprise segment of its business.
“The Q1 and FY19 guidance, which imply a ~20% decline for Q1 and ~10%-11% decline for FY2019, make us wonder what, beyond accounting changes, is going on in the business,” he wrote.
Symantec’s investor relations chief said at the beginning of the company’s earnings call that “financial results and guidance may be subject to change based on the outcome of the audit committee investigation.”
That disclosure gave Piper Jaffray analyst Andrew Nowinski pause. “Despite the strong results, we believe this investigation creates too much uncertainty to have confidence in management’s FY19 guidance, as this could affect historical results and future demand trends,” he wrote. Nowinski downgraded Symantec shares to neutral from overweight and lowered his price target to $24 from $32.
MoffettNathanson analyst Adam Holt argued that trends already aren’t great at Symantec and “may get much worse” due to the internal investigation. “In our experience, they generally do, especially with highly acquisitive businesses,” he wrote. Such investigations, whether on an internal, external, or SEC level, “almost never finish completely without issue.”
Holt was also struck by management commentary on the potential for merger activity going forward. “Given the slowing growth in the enterprise where there are questions about share losses, the longer term relevance of the proxy server and the diminishing impact of product cycles, Symantec will likely have to do more deals and possibly a bigger one,” he wrote. Holt said that this concerns him given high multiples in the security industry and the high likelihood that a potential deal would be margin dilutive.
As for the latest numbers, Holt calculated that short-term enterprise billings fell 15% in the most recent quarter. “Our checks suggested that Symantec was pushing multi-year deals, some as long as seven years, and durations…have been propping up billings growth, which isn’t sustainable.”
Holt downgraded his rating to sell from neutral. He has a $20 price target on the stock.
Symantec’s stock is now trading at its lowest level since June 2016. Shares are down 39% over the past 12 months, while the S&P 500 SPX, +0.17% has gained 13%.
The company’s bonds tracked the stock price movement, prompting CreditSights to upgrade them to outperform from market perform.
“Symantec’s 2025s have widened by about 55 basis points since last night and are now yielding 5.5%, which is similar to Seagate and the BB index i.e. wider than most crossover tech credits,” analyst Jordan Chalfin wrote in a commentary.
Crossover credits are those that carry both investment grade and high-yield, or “junk,” credit ratings. Chalfin said his rating is “not for the risk-averse, as we have very limited information on the internal investigation.
He added that Symantec has been delivering and plans more debt reduction in fiscal 2019.
Spreads on the 3.950% notes that mature in June of 2022, widened by 135 basis points to 250 basis points over comparable Treasury’s, according to MarketAxess. The price fell 5 points to 94.983 cents on the dollar to yield 5.333%, according to MarketAxess.
About Symantec Corporation:
Symantec Corporation (NASDAQ: SYMC), the world’s leading cyber security company, helps organizations, governments and people secure their most important data wherever it lives. Organizations across the world look to Symantec for strategic, integrated solutions to defend against sophisticated attacks across endpoints, cloud and infrastructure. Likewise, a global community of more than 50 million people and families rely on Symantec’s Norton and LifeLock product suites to protect their digital lives at home and across their devices. Symantec operates one of the world’s largest civilian cyber intelligence networks, allowing it to see and protect against the most advanced threats.
For more information: marketwatch.com/symantec-stock-downgraded-about-internal-audit
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