Is EMC a Safe Investment in this Environment?

With shares of EMC Corporation (NYSE:EMC) trading at around $22.71, is EMC an OUTPERFORM, WAIT AND SEE or STAY AWAY? Lets analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stocks Movement

EMC has a strong presence in big data, IT, and cloud computing. However, there is also big potential in security. As hackers become more sophisticated and brazen, threats to the United States government and big banks increase. The United States government might decrease spending in the future, but its not going to cut Internet security, especially after recent attacks. Its highly rumored that Iran is behind recent cyber-attacks as retaliation for our Stuxnet malware attack on Iranian nuclear facilities. EMC is well aware of whats taking place, and intends to spend on acquisitions so it can position itself to become the top security option for the United States government as well as big banks. EMC certainly has the cash to do it.

Based on the way this article has read so far, you might expect to read about secret agents, espionage, and covert operations. Unfortunately, thats not the case. EMC is a great company, but its not that interesting. However, what might interest some readers/investors is the fact that EMC has seen consistent revenue and EPS improvements on an annual basis. Growth has slowed, but considering many companies throughout the broader market saw no growth in 2012, any growth is a positive. As hinted at above, EMC also has superb cash flow and a strong balance sheet. This will allow EMC to weather economic storms better than many of its peers.

Lets take a look at some comparative numbers. The chart below compares fundamentals for EMC, NetApp (NASDAQ:NTAP), and Seagate Technology Public Limited Company (NASDAQ:STX). EMC has a market cap of $48.04 billion, NetApp has a market cap of $12.54 billion, and Seagate has a market cap of $12.46 billion.

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EMC

NTAP

STX

Trailing P/E

18.50

25.10

4.51

Forward P/E

11.03

13.70

6.35

Profit Margin

12.59%

8.11%

19.80%

ROE

13.18%

11.82%

101.19%

Operating Cash Flow

$6.26 Billion

$1.51 Billion

$4.36 Billion

Dividend Yield

N/A

N/A

4.20%

Short Position

2.50%

4.50%

8.50%

 

Lets take a look at some more important numbers prior to forming an opinion on this stock…

E = Equity to Debt Ratio Is Strong

The debt-to-equity ratio for EMC is stronger than the industry average of 0.20.

Debt-To-Equity

Cash

Long-Term Debt

EMC

0.07

$6.17 Billion

$1.71 Billion

NTAP

0.48

$6.72 Billion

$2.24 Billion

STX

0.96

$1.87 Billion

$2.82 Billion

 

T = Technicals Are Weak

EMC has underperformed the market over the past year. Considering the strength of the company and its potential going forward, its somewhat surprising the stock hasnt performed better.

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1 Month

Year-To-Date

1 Year

3 Year

EMC

-10.41%

-10.24%

-21.17%

17.30%

NTAP

0.46%

3.49%

-12.74%

-1.22%

STX

-1.75%

14.17%

27.10%

96.78%

 

At $22.71, EMC is trading below all its averages.

50-Day SMA

23.93

100-Day SMA

24.35

200-Day SMA

25.07

 

E = Earnings Have Been Steady

As stated earlier, revenue and earnings have consistently improved on an annual basis.

2008

2009

2010

2011

2012

Revenue ($)in billions

14.88

14.03

17.02

20.01

21.71

Diluted EPS ($)

0.61

N/A

0.88

1.10

1.23

 

When we look at the previous quarter on a year-over-year basis, we see improvements in revenue and earnings. We also see improvements in revenue and earnings on a sequential basis.

12/2011

3/2012

6/2012

9/2012

12/2012

Revenue ($)in billions

5.57

5.09

5.31

5.28

6.03

Diluted EPS ($)

0.38

0.27

0.29

0.28

0.39

 

Now lets take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Might Support the Industry

Other than security, all areas of operation for EMC might be negatively impacted if there is a global slowdown. However, the government and big banks wont take cyber threats lightly. If EMC can be the dominant player in this area, then demand for its services will be high.

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Conclusion

EMC is solid company. That has been the case for many years. It lost value in 2008, but it remained profitable, which wasnt easy to find in that environment. It also held up better than most stocks. The impressive balance sheet and strong cash flow are big positives for this environment.

EMCs stock might not impress investors in the near future, but it should be one of the safer tech plays if market conditions weaken. If the market holds its own or improves, then EMC is an OUTPERFORM. But its more likely that there will be some difficult times ahead, which makes EMC a WAIT AND SEE.

Using a solid investing framework such as this can help improve your stock-picking skills. Dont waste another minute click here and get our CHEAT SHEET stock picks now.

Disclosure: All content posted represents my opinion and views and should never be considered professional advice. You should do your own research and consult with a professional financial advisor before making any investment decisions. I do not have a position in this stock. I am currently short technology, financials, the Russell 2000, and the euro.

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