Is EMC’s Stock a Sell After These Earnings?

The days of storing data on USB drives are over as cloud computing has begun to dominate information storage. The convenience, the safety, and the versatility of cloud storage have developers creating systems for personal and professional use. While these systems rapidly redefine how we manage data, these information technology companies are gaining attention in their respective market. One notable company is EMC Corporation (NYSE:EMC) that develops information infrastructure technologies to efficiently manage the increasing amounts of data stored by companies for a low-cost. Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

EMC’s reported Q3 sales were lighter than expected, which in turn led to an adjustment in the outlook for non-GAAP EPS in FY12. However, taking all things into consideration, EMC demonstrated solid execution in a difficult macro-economic environment and outperformed peer companies. While not immune, EMC’s portfolio is built with the ability to withstand these conditions. With a diverse array of products, the incorporation of Java, and the acquisition of other brands, EMC will be able to pose strong competition within its market in the foreseeable future.

The cash flow statement from 2009 to the present is very strong.  It has consistently been cash flow positive, and earnings are projected to continuegrowing in the future. A massive market cap of $54,066.9 million is attractive to the investor because it provides a sense of stability and safety based on size alone. In addition, EMC traded at a multiple (EV/EBITDA) of 2.01 in 2011; this low multiple shows that investors may be getting a value investing in EMC.

EMC announced at the end of October that an agreement was signed to acquire Silver Tail Systems, a cash flow positive, privately held company in the Dec-Q. While it is not expected to have an impact on EMC’s GAAP or non-GAAP EPS in 2012 as it is nearing its end, the impacts of this acquisition will be reflected in the near future. This acquisition is important to note as EMC has a record of intelligent acquisitions and making them work. Silver Tail Systems, in particular, is likely to enhance EMC’s security abilities beyond competitors—a top priority for large companies.

When analyzing EMC Corporation, it is crucial to take into account its 80% ownership of outstanding shares in VMware (NYSE:VMW), the clear market leader in the server virtualization market. While VMware faces competition from developing companies, they beat consensus EPS in 3Q12 at $0.70, and are in-line with consensus estimates for the fiscal year with a good chance of outperforming guidance expectations. While having such a large stake in VMW is a double-edged sword for EMC, the consistent performance by VMware poses little threat for EMC Corporation as it accounted for a significant portion of their Q3 revenue.However, the other side to the “double-edged sword” is that if VMW flat lines, EMC is unlikely to see much growth as EMC and VMW shares have traded for the past three years with a correlation of 0.73…

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A= A-Level Management Runs EMC

EMC is equipped with strong leadership at the management level. Joe Tucci has been the CEO since 2006. Preceding his role at EMC Corporation, he was the CEO of Gentronics and Wang Global from 1993 to 1999, both successful information technology service companies. In addition, he is the Chairman of the Board of Directors at VMware.

Prior to joining EMC as Chief Strategist, Paul Maritz was the CEO at VMware where he began the company’s transition from a technology leader in virtualization to one in cloud computing. Maritz is in charge of driving innovation and growth at EMC. His impressive list of credentials includes fourteen years at Microsoft and five years at Intel, proving his familiarity in the industry and an ability to maintain EMC’s position as an industry leader.

Furthermore, in 2011, Institutional Investor named David Goulden, the current President and COO, the best CFO in IT Hardware. In 2012, EMC was ranked 12th out of 500 publicly traded companies in the United States based on the previous year’s financial performance. The strong management currently at the forefront of EMC points to favorable earnings in the near future.

E = Excellent Relative Performance Versus Peers and Sector

EMC Corporation is often compared to technology companies including Hewlett-Packard Co. (NYSE:HPQ), CA Inc. (NASDAQ:CA), Citrix Systems Inc. (NASDAQ:CTXS), and Dell Inc. (NASDAQ:DELL). These comparisons can be misleading, as EMC is not producing computers like HP and Dell. Out of these companies, Dell has had some success in integrating cloud storage into their marketing strategy. HPQ continues to lag behind the competition and appears to be struggling to incorporate data storage into their products relative to the others.

The company most similar to EMC is NetApp Inc. (NASDAQ:NTAP). While these two companies should remain the dominant players, EMC has been able to steal some of NetApp’s business with the introduction of a lower-end product line. While these two companies will continue to vie for market dominance (NetApp recently announced a new product line in response to EMC stealing market share), EMC’s products are known to be superior, which means that as there is an increasing demand for cloud computing, EMC will see a large portion of the sales.

When examining the earnings multiple for EMC compared to its peers, we must take into account the fact that the number itself is deceiving due to a large portion of EMCs earning coming from their stake in VMware. EMC is currently trading at a multiple (P/E) of 14.7, and even after taking out the earnings due to VMware, one is still left with a good-sized company with FY12 revenue estimated to be roughly $21,000 million, a strong cash-flow, and zero debt—a very good value…

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T = Trends Support the Industry in which the Company Operates

It is undeniable that cloud computing is here to stay and is only going to become more relevant to people outside of the business realm. If you have heard of Apple’s iCloud, Google’s Drive, Microsoft’s SkyDrive, or Dropbox, you have already experienced personal cloud storage. Bandwidth speeds cannot sustain enterprise storage needs, which is what differentiates EMC from other peer companies like HPQ and DELL.

As more information becomes available to companies, investing in digital data storage will become increasingly necessary; and as a market leader, EMC Corporation will be impacted by this growth.  It is estimated that in FY13 and FY14, sales in information storage will increase by 6.8% and 14.2% respectively. At the same time, VMware’s sales are estimated to grow 18.5% and 18.1%. Sales growth in information storage and in VMware will be reflected in EMC’s earnings.


Although cloud storage solutions are not going away—at least for a reasonably long period of time—there are undoubtedly risks involved with investing in EMC Corp. As mentioned above, EMC has an 80% stake in VMware, which is where EMC derives more than 50% of its value. The augmentation of competition from VMW is also a concern for EMC’s future performance—not necessarily from other virtualization technology, but from alternatives that are cheaper and that do not lock customers in to working with one vendor. Additional risks include the inability to continue to gain more market share, and the potential of a public cloud.

While the risks are important to take into consideration, I believe that EMC’s stock will ultimately OUTPERFORM. Although Q3 earnings were weak, the company has consistently outperformed its competition and continues to be dominant amongst its peers. The turbulent macro conditions delayed orders toward the end of the quarter, which will be reflected in Q4 reports.

EPS has consistently increased since 2005 and is projected to in 2012 and 2013.  The macro-economy conditions lead to uncertainty, but this market leader is bound to see growth with the constant evolution in storage technology. In addition, the continuous diversification of EMC’s products and services including the adoption of Flash, acquisition of Silver Tail Systems, and introduction of less expensive solutions will help the company sustain growth.

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