Analysis: NLOK AVGO LOGI

After you receive this Alert, we will be initiating a position in NortonLifeLock (NLOK) , buying 1,500 shares at roughly $20.04. Following the trade, NLOK will represent 1.01% of the portfolio.

As we talked about in our initial Bullpen post here, NortonLifeLock is an industry leading and worldwide recognized user-centric Consumer Cyber Safety business, which provides Device Security, Identity Threat Protection and Privacy software that protects customers from threats posed by cyber criminals.

With Covid-19 accelerating online activity and working from home, NortonLifeLock is in a great position to meet the growing need for cyber safety. Management is attacking this opportunity with a step up in marketing spending, especially in international markets, and if they see good yields on this investment the company will deliver more consistent top-line growth, better customer retention, and higher average revenue per users (ARPU). And this is a business where 90% of sales are direct to consumer through the company's e-commerce platform, making the operation largely indifferent to bricks-and-mortar restrictions related to Covid-19.

There is also a self-help story here that we always like. One of the goals following the sale of the enterprise division to Broadcom (AVGO) was to eliminate stranded costs by August 2020 and sell underutilized assets. Management has made great strides in accomplishing this goal, reducing about 70% of its stranded costs as of the May quarter and generating $750 million in cash from the sale of two smaller businesses. But there are still moves to be made, including the sale of real estate that is worth an additional $750 million.

Longer term, management is committed to growing the top line at a low to mid-single digit percentage, achieving a 50% operating margin, and with share-count reduction, delivering $1.50 in earnings per share. Given the near-term needs for secure work-from-home activity and the second quarter strength in the PC market, we would not be surprised to see management hit this target quicker than expected. And as we wait for the company to achieve that number, the stock offers a solid 2.5% dividend yield.

Since our initial post, NortonLifeLock has hired Natalie Derse as its Chief Financial Officer. She brings with her a consumer-centric background and plenty of financial management experience. Derse joins a management team led by the fantastic CEO Vincent Pilette. He's a money-maker and formerly the CFO of Logitech (LOGI) .

We are initiating the position with a $24 price target, representing 16x management's $1.50 EPS target.