“For EMC Corp. (EMC), a cloudy forecast suggests a sunny outcome. The company primarily sells storage devices and software that help companies handle the avalanche of electronic data. But EMC is also positioned to benefit from the migration to cloud computing, which allows companies to reduce costs by taking advantage of underutilized computing power. EMC is a Buy and a Long-Term Buy.
“Known for issuing conservative guidance, EMC says it expects 2012 revenue of $22.0 billion, up 10%, and per-share earnings of $1.70 excluding special items, up 12%. Growth should be driven by continued expansion into emerging markets and upgraded products in all segments. In comparison, EMC expects overall technology spending to rise 3% to 4% in 2012, about half of last year’s rate. EMC expects to grow free cash flow in 2012, the sixth consecutive annual increase.
“CEO Joseph Tucci also says EMC’s board is actively discussing a dividend, though he made no promises. Instead, he reaffirmed plans to spend on research and small acquisitions. ‘I’m still committed to this string of pearls approach we have, where we buy exciting new companies... and grow them substantially into billion-dollar businesses.’
“EMC’s largest and shiniest pearl is VMware (VMW), acquired in January 2004 for $635 million. EMC sold part of VMware in a 2007 public offering but retains an 80% stake in the company, which now has a total stock-market value of $42.31 billion. VMware produced 19% of EMC’s revenue and 24% of net income last year, yet it accounts for about 57% of EMC’s market value.
“VMware uses cloud infrastructure to optimize data centers, pooling together the capacity of multiple servers, storage infrastructure, and networks, then allocating those resources as needed. The cloud strategy increases utilization of computing resources and lowers spending per unit of information processed. Last year, VMware’s sales jumped 32% and its net income more than doubled, growth rates that justify an outsized valuation.
“VMware complements EMC’s three other business units. Information-storage products and software (73% of 2011 revenue) helps clients collect, store and analyze data that has snowballed into the range of petabytes (one petabyte equals one million gigabytes). Sales for the storage unit grew 16% last year. The information-intelligence group (4%) helps companies collect, access and retain emails and electronic files. The RSA information-security unit (4%) sells software and services that encrypt information, prevent the loss of data and protect against fraud.
Valuation
“EMC shares trade at 18 times trailing earnings, a 23% discount to their five-year average price/earnings ratio. Excluding VMware, EMC has a trailing P/E of just 10, about 27% below the median for computer storage and peripherals in the S&P 1500 Index. But even if its P/E holds at 18, should EMC merely meet its 2012 profit estimate, the shares will bounce 14% higher by early next year.”
Richard J. Moroney, CFA, Dow Theory Forecasts, 2/27/12
Second Opinion: EMC Corp.
“EMC reported strong 4Q results with revenues up 14% to $5.6 billion and earnings up 32% to $832.0 million, or $0.38 per share. Joe Tucci, EMC Chairman and CEO, commenting on the results, said, ‘EMC had a strong and record-breaking 2011. There’s no doubt that cloud computing is completely transforming the IT industry and that Big Data promises to have a similarly profound effect on transforming the way we work and live. Our customers and partners have these transformations in their sights and are embracing EMC’s vision, strategy and best-of-breed portfolio.’
“The company provided impressive 2012 guidance for revenues of $22 billion and earnings of $1.70/ share. The company expects to repurchase $700 million in shares during 2012. The largest data storage manufacturer continues to execute their turn- around plan and the results are showing. They are gaining market share in cloud computing and their 80% ownership of VMware, a leader in virtualization technology, is helping their efforts. Virtualization improves server utilization, saving 50%-70% in overall IT costs. My earnings estimates are $1.75 in 2012 and $2.00 in 2013. Applying a P/E ratio of 15x makes my 12-18 month target price $30.00 a share. EMC—Core Position—Strong Buy.”
Eric Dany, Stock Prospector, 2/10/12
