Bear of the Day: Symantec

 

Even though it’s in one of the hottest and most in-demand industries – cyber security – and even though it recently reported quarterly earnings that handily beat analyst estimates, Symantec (SYMC) shares have been in a slump of late, losing nearly a quarter of their value so far in 2018, versus a 3% gain in the S&P 500.  

The culprit? Reduced guidance in each of the last two quarters and the revelation of an internal investigation that threatens to cast doubt on previously reported results.

After reporting earnings of $0.46/share on May 10th, beating the Zacks Consensus estimate of $0.40/share by 15%, Symantec disappointed investors with soft revenue figures and by reducing guidance for the second consecutive quarter, predicting Fiscal year 2019 revenues of $4.83B and earnings of $1.58/share.

Analysts were quick to reduce their estimates for the company, with 13 out of 14 represented in the Zacks Consensus Estimates lowering their expectations to an average of $1.59/share, down from $1.82/share just 30 days ago.
Symantec is currently a Zacks Rank #5 (Strong Sell).

The real bombshell in the announcement was the news that the company had hired an outside audit firm and opened an internal investigation into its financial reporting practices based on concerns raised by a former employee.  The company did not elaborate on the specific nature of the inquiry, though they did confirm that the issue did not involve a data breach or problem with its services or software.

Symantec voluntarily notified the SEC of the investigation.

Symantec spooked investors even further by stating that they did not have a time frame for the completion of the investigation other than to say that it would likely delay the filing of the company’s annual 10-K report, and that restatement of previously reported results was a possibility.

Even though Symantec has two of the hottest brands in anti-virus and identity theft protection, Norton and LifeLock, the black cloud of accounting irregularities hangs heavy over the shares. Though it’s never positive news, an internal investigation is not necessarily death for a stock, but investors detest uncertainty and Symantec’s decision to not reveal the nature of scope of the potential issue had shareholders running for the exits.

Accurate and timely financial data is absolutely necessary for investors to effectively evaluate their holdings. Reducing guidance is a negative development, but the wildcard of possible restatements is far worse. Rational shareholders will steer clear of Symantec until this issue is resolved.

In the cyber-security sector, Symantec competitor Fortinet (FTNT) is a considerably better buy with a Zacks Rank #2 (Buy).


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