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Shortly before the closing bell, we will be buying 300 shares of NortonLifeLock (NLOK) at roughly $24.89. Following the trade, the Charitable Trust will own 2,600 shares of NortonLifeLock, representing 1.53% of the portfolio.
As a reminder, if our trade alert is issued with less than 45 minutes in the trading day, Jim executes the trade 5 minutes before the market closes. By waiting, we presume that Investing Club members will receive a better price in the market than what we do.
NortonLifeLock announced Monday morning that its pending merger with the European-based consumer cybersecurity company Avast was cleared by the U.S. Department of Justice. The news passes a regulatory hurdle that we previously thought posed some risk because the deal combines two of the top three market leaders in the consumer cybersecurity industry. NortonLifeLock continues to expect the transaction will close in mid-2022.
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Despite what we believe to be is positive news, shares of NortonLifeLock are noticeably under pressure today, down roughly 2-3% at the time this was written. Several names in the cybersecurity space were trading lower Monday after Morgan Stanley initiated CrowdStrike with an underweight rating, but there could be a company-specific reason that explains the NLOK decline too.
What's causing the pullback
We think the pullback today might be because NortonLifelock will have to issue stock as part of the transaction. The final terms of the deal are dependent on the election by Avast shareholders — the meeting is scheduled for this Thursday — but by and large, investors do not like it when their ownership percentage of a company gets diluted. No matter the stock NortonLifeLock will have to put up, we are comfortable with the dilution for a few reasons.
Most importantly, NortonLifeLock and Avast coming together makes both strategic and financial sense. It creates the industry leader in consumer identity and privacy solutions with over 500 million users and roughly 40 million direct customers. We see those numbers growing in the coming years, as the combined company puts together a comprehensive offering in consumer cyber safety — which is a significantly unpenetrated market that will only become more important as more and more of our daily lives become ingrained into the digital world.
There are significant value creation opportunities from the deal too, with management identifying $280 million of annual gross cost synergies.
Also, if Avast shareholders choose the majority stock option, NortonLifeLock plans to partially offset the dilution and optimize its capital structure by increasing its current share buyback program by up to $3 billion. With the combined company expected to generate $1.5 billion of free cash flow annually, management will have the firepower to offset dilution by repurchasing stock hand over first.
Given our positive view of the merger, we think today's pullback on good news is a buying opportunity and we are adding to our position. After making a couple of opportunistic since over the past six months, once selling 300 shares at $26.72 and another 300 shares at $27.47, we think NLOK back under $25 represents a great level to begin buying back what we sold higher.
We also note that NLOK offers investors a solid 2% dividend yield which pays us as we wait for the merger to close next year. Also, NLOK trades at a mid-teen forward price to earnings multiple, representing a significant discount to the low-20s takeout multiple of rival McAfee. NLOK may be slower growing, but we think its multiple will expand as investors increase their appreciation for the market leadership.
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As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Typically, Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If the trade alert is sent pre-market, Jim waits 5 minutes after the market opens before executing the trade. If the trade alert is issued with less than 45 minutes in the trading day, Jim executes the trade 5 minutes before the market closes. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. See here for the investing disclaimer.
(Jim Cramer's Charitable Trust is long NLOK.)