Out Of The Cloud, Sun Shines On EMC

2/27/2012


  Recent Price
$27
  Dividend
$0.00
  Yield
0.0%
  P/E Ratio
18
  Shares (millions2
2,183
  Long-Term Debts as % of Capital
0%
  52-Week Price Range
$28.73 - $19.84

For EMC ($27; 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.

Of pearls and petabytes

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 ($98; 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.

Conclusion

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. An annual report for EMC Corp. is available at 176 South St., Hopkinton, MA 01748; (508) 435-1000; www.emc.com.

EMC
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Dec '11
0.49
vs.
0.42
+14%
25.13
-
19.99
17 - 14
Sep '11
0.37
vs.
0.30
+ 18%
28.25
-
19.84
20 - 14
Jun '11
0.35
vs.
0.28
+ 20%
28.73
-
25.39
22 - 19
Mar '11
0.31
vs.
0.26
+ 18%
27.59
-
22.84
22 - 18
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend ‡
($)
52-Week
Price Range
($)
P/E Ratio
Range
2011
20.01
1.52
0.00
28.73
-
19.84
19 - 13
2010
17.02
1.26
0.00
23.20
-
16.45
18 - 13
2009
14.03
0.90
0.00
18.44
-
9.61
NM
2008
14.88
1.00
0.00
18.60
-
8.25
19 - 8
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
92
76
57
87
85
83
65

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.
   NM Not Meaningful.


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