By Jonathan Rudy Without a doubt, it has been an extremely difficult year for the stock market, especially technology issues. With second-quarter reporting season just under way, it appears that prospects for any sustainable earnings upturn for the sector have been pushed back a couple of quarters. And if that's the case, many tech companies may not survive to see the eventual economic recovery.
Among the doom and gloom, one segment of the beleaguered software industry has held up better than other industry groups: Internet security software. And one positive story, in particular, appears to have been overlooked. On July 17, Symantec (SYMC) reported a better-than-expected June quarter amid a tide of tech-sector disappointments. However, the positive report was overshadowed by the market's concerns over three small cash acquisitions Symantec announced the same day.
The shares of this leading provider of security solutions are down about 4% in 2002 but are outperforming the majority of the software industry. Symantec has been doing extremely well in its consumer antivirus business and appears to be gaining steady traction in its enterprise business as well, thanks to its 2000 acquisition of Axent Technologies.
IN THE SPOTLIGHT. Symantec's Norton Antivirus is one of the two top antivirus software products. Antivirus programs protect computers from destructive infections spread via the Internet and other serious file-related problems. Such products have received increased attention because of some high-profile virus outbreaks. According to initial estimates, the damage caused to companies and other organizations by the "I Love You" virus was in the billions of dollars.
And those three small acquisitions mentioned earlier? The recently announced deals to buy Riptech, Recourse Technologies, and SecurityFocus were for a cash total of $355 million. While the current market environment makes investors apprehensive about any merger and acquisition activity, we believe that these deals are interesting from a technology standpoint and should complement Symantec's current suite of products well. Also, the relatively small size of the deals means there's less risk involved in integrating the new operations.
We at Standard & Poor's see Symantec's revenues rising about 16% in fiscal 2003 (ending March). Our expectation is for earning per share to increase in the low double digits during fiscal 2003, to $1.44. The shares, which recently traded at 22 times our fiscal 2003 estimate, are appealing, given Symantec's expected long-term earnings growth rate of 15% to 20%, its strong brands, and solid balance sheet. The stock, which carries S&P's highest investment recommendation of 5 STARS (buy), is attractively valued and should outperform the market over the next year. Analyst Rudy follows software stocks for Standard & Poor's