Analysts' Choice: VMware Profits From Clouds In Forecast

7/24/2017


  Recent Price
$92
  Dividend
$0.00
  Yield
0.0%
  P/E Ratio
20
  Shares (millions)
414
  Long-Term Debt as % of Capital
9%
  52-Week Price Range
$98.00 - $67.25

VMware ($92; VMW) shares have slumped 9% since June 1, when the software company released its April-quarter report. The results and guidance were strong. However, investors have become accustomed to impressive reports, given that VWware has topped consensus profit and sales estimates in 12 straight quarters. The stock had also rallied 24% in the first five months of 2017; expectations were running especially high.

But there's still plenty to like about VMware, a company that sells software and services to support data centers. The sell-off leaves shares looking unusually cheap, even as VMware keeps delivering double-digit growth in many key operating metrics. The stock scores above 50 for all six Quadrix categories, contributing to an Overall rank of 95. VMware is a Focus List Buy and a Long-Term Buy.

Resetting expectations

VMware's virtualization software lets multiple virtual machines with different operating systems run on a single physical machine. Benefits of this arrangement include lower equipment costs and higher productivity. The company also provides services, including customer support and consulting. The less-profitable services unit has steadily become a larger part of VMware's business, now representing 61% of annual sales, versus 32% a decade ago.

More businesses are comfortable using the public cloud rather than their own personal data centers. Seizing on this trend, VMware is rolling out new cloud-computing tools through a partnership with Amazon.com ($1,027; AMZN) to help customers migrate to Amazon Web Services (AWS). Clients can still use familiar VMware applications on AWS, eliminating the need to retrain staff to use new software. Management claims "great customer momentum" for this product, due out in the middle of the year. Better yet, both companies are reportedly looking to expand their partnership. Discussions center on VMware designing software that would let customers use AWS while still retaining some of the data on their own servers.

In the 12 months ended April, the company has grown per-share profits 18%, sales 8%, and operating cash flow 26%. Results aren't entirely comparable, due to VMware changing its reporting schedule to match Dell Technologies ($64; DVMT), which owns 82% of the company's stock. VMware's fiscal year now ends in January rather than December.

Free cash flow has surged 36% to $2.28 billion over the past year, pushing net cash to $7.11 billion, or $17 per share. The company does not pay a dividend but has repurchased 4% of its shares in the past two years.

Shares trade at 20 times trailing earnings, below the S&P 1500 technology sector's median of 21 and the systems-software industry's median of 27. Backing out net cash reduces VMware's P/E ratio to just 17.

Rising analyst estimates project earnings per share of $4.93 for fiscal 2018, above management's target of $4.91. If VMware meets the current consensus estimate and its P/E ratio rises to 20, the stock will reach $99 by early 2018.

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
Apr '17 ‡
0.99
vs.
0.86
9%
94.49
-
77.94
21 - 18
Dec '16
1.43
vs.
1.26
9%
83.00
-
72.05
20 - 17
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
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2016
7.09
4.39
0.00
83.00
-
43.25
19 - 10
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
3.57
0.00
99.10
-
64.86
28 - 18
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
95
79
66
90
92
94
55

   * Earnings exclude special items.
   † Quadrix scores are percentile ranks, with 100 the best.
   ‡ April quarter of 2017 versus March quarter of 2016 for earnings, four months ended    April for price range.
   NA Not available.


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