A Spec Play in the Rising Cyber Security Market

Joseph is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Cyber security is being discussed by many, including politicians in Washington. An executive order was issued in February by President Obama, that directs development of "voluntary cyber standards for privately-held assets considered critical to national security" by our government, according to Bloomberg.

The Department of Homeland Security is set to investigate which industries will be subject to the executive order. Obvious no-brainers would be banking and telecommunications, as well as technology companies. Cyber attacks seem to be increasing as well, with Virginia Democrat Mark Warner elaborating that, “There’s more and more recognition, industry by industry, that the sheer volume of threats can’t be hidden anymore.”

The banks

Numerous banks around the nation have already experienced cyber attacks. The latest bank to experience a pesky cyber attack was JPMorgan Chase (NYSE: JPM), where a denial-of-service attack prevented access to some customers from their main banking site. While this disruption was more of an annoyance than a major problem, JPMorgan has also warned investors that cyber attacks may become more frequent. 

Wells Fargo knows what it's like. Their site experienced problems caused by hackers for four days in December. Other banks, such as US Bancorp and Bank of America, have been attacked in a similar fashion as well. Apparently JPMorgan was the first on a list of nine banks in a new string of attacks, linked to an Islamic terrorist group, Izz ad-Din al-Qassam. Even the Federal Reserve has been under cyber attack.

Tech companies

Tech companies are being targeted more frequently as well. Apple (NASDAQ: AAPL) fell victim to attacks back in February. The hackers apparently hacked some employees' Mac computers when these employees visited a website for software developers. This website was infected with Malware, designed specifically to attack Macs, and it infected the Mac computers by exploiting a flaw in Java software used as a plug-in on Web browsers.

This same malicious software was apparently also responsible for hacking Facebook as well. The shift from hackers focusing strictly on PCs and moving to Macs also may take away some of Apple's security image, as Apple security expert Charlie Miller explained that (in reference to the Mac OS X Operating system), "The only thing that was making it safe before is that nobody bothered to attack it. That goes away if somebody bothers to attack it."

How to invest

Symantec (NASDAQ: SYMC), according to Yahoo! Finance, provides security, storage, and systems management solutions to various organization and consumers worldwide. It operates in four segments: Consumer, Security and Compliance, Storage and Server Management, and Services. The company provides internet security technology for not only corporations, but for the government as well.

According to Forbes, the company has only 10% exposure to public government. This could rapidly expand, however, as the federal government looks to ramp up legislation, and most importantly for internet security firms, spending. As corporations (especially banks and tech companies) look to beef up security, internet security companies should see a rise in revenues. Symantec is a leader in the IT security market.

Fundamentals/valuations:

<img src="http://g.fool.com/editorial/images/25874/screen-shot-2013-03-21-at-124454-am_large.png" />

Ok, so revenue has been increasing along with earnings over the last two years. A falling P/E ratio may signify more potential value, as well. The company is also trading at only around 12-13 times forward earnings. It announced a new capital allocation program in January, that may inject some momentum into the stock going forward.

Symantec also plans to initiate its first ever cash dividend, which probably means things are looking up. The company has also planned a share repurchase program worth over $1 billion. It intends to pay out 50% of free cash flow in dividends and buybacks. The buyback may prop up earnings per share as well. All of these factors, combined with more cyber security spending, may greatly improve the company's fundamental story going forward. 

<img src="http://g.fool.com/editorial/images/25874/screen-shot-2013-03-21-at-125649-am_large.png" />

The company also looks strong financially, with enough cash on hand to pay off its long-term debt and have around $1 billion left over.

The bottom line

Depending on how this whole cyber security issue pans out, Symantec could be one of those who prospers. The company is strong financially, and is starting to open up to shareholders. It is more of a spec play at this point, and it might be wise for investors to keep an eye on earnings for a couple of quarters, along with a watchful eye on the success or failure of the new capital allocation plan before jumping in.


Joseph Harry has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and JPMorgan Chase & Co.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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