Analysts' Choice: Creating Markets From Nothing At All

11/21/2016


  Recent Price
$78
  Dividend
$0.00
  Yield
0.0%
  P/E Ratio
19
  Shares (millions)
425
  Long-Term Debt As % Of Capital
16%
  52-Week Price Range
$79.15 - $43.25

While VMware ($78; VMW) deals in the virtual, its growth is real.

The company's software combines the resources of servers, storage devices, and networks to allocate processing power where clients most need it, enhancing efficiency. While overall technology spending hasn't been great this year, hurt in part by economic concerns overseas, the long-term move toward more complex networks should benefit VMware.

Last month, the company declared per-share-profit growth of 12% for the September quarter on 6% higher revenue and a 51% gain in operating cash flow. Over the last year, per-share profits increased 9%, with revenue up 7% and operating cash flow 32%.

Sales and earnings topped the consensus in the September quarter, and analyst estimates are rising. Wall Street expects per-share-profit growth of 10% in the December quarter and 8% in 2017, overly conservative targets. VMware joined the Buy and Long-Term Buy lists in the Nov. 7 issue.

New tech, new growth

Going forward, VMware's business will become even more virtual. The company now markets software-defined data centers, delivering the entire application and storage infrastructure as a service. It also operates in cloud-computing environments and manages mobile networks. Licensing bookings for physical computer virtualization accounted for less than half of the September quarter's total business, illustrating the importance of the newest technology.

Large businesses accounted for one-third of total bookings for the quarter, including six deals of at least $10 million. By broadening its product line, VMware should boost its ability to sell to enterprise customers, who expect to kill multiple birds with each tech-spending stone.

VMware's growth in billings accelerated in the last two quarters, reaching 13% in the September period. The cloud and software-as-a-service accounted for just 8% of revenue in the quarter but managed "strong double-digit" growth, according to the company.

Still nicely priced

VMware's achievements have not gone unnoticed. So far this year, the shares have jumped 39%. Yet despite that price momentum, VMware trades at just 17 times expected year-ahead earnings, 36% below the average systems-software maker in the S&P 1500.

Computer giant Dell Technologies owns more than 80% of VMware, acquired via its September merger with EMC. To help fund its purchase of EMC, Dell launched a tracking stock for VMware (DVMT) that trades at a 35% discount to actual VMware shares. However, we recommend purchasing VMware itself rather than the tracking stock. DVMT is an obligation of Dell, exposing owners to Dell's highly leveraged balance sheet.

While VMware has historically used a December fiscal year, it is switching to a January year in 2017 to match up with Dell; January results will be included with the December quarter, complicating comparisons going forward. But that's a problem to address next year.

An annual report for VMware Inc. is available at 3401 Hillview Ave., Palo Alto, CA 94304, (650) 427-5000, www.vmware.com.

VMWARE
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Sep '16
1.14
vs.
1.02
6%
76.99
-
56.09
19 - 14
Jun '16
0.97
vs.
0.93
6%
65.31
-
49.76
16 - 12
Mar '16
0.86
vs.
0.86
5%
57.27
-
43.25
14 - 11
Dec '15
1.26
vs.
1.08
10%
82.35
-
52.72
21 - 14
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2015
6.65
4.06
0.00
93.43
-
52.72
23 - 13
2014
6.04
3.56
0.00
112.89
-
75.85
32 - 21
2013
5.21
3.37
0.00
99.10
-
64.86
29 - 19
2012
4.61
2.85
0.00
118.79
-
79.46
42 - 28
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
98
88
65
91
92
95
90

   * Earnings exclude special items.
   † Quadrix scores are percentile ranks, with 100 the best.
   NA Not available.


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