EMC Increases its Focus on Software

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Nov 28, 2014

In this article, let's take a look at EMC Corporation (EMC, Financial), a $60.82 billion market cap company that is one of the world's largest suppliers of enterprise storage systems.

Cash is King

The company has more than $11 billion in cash and equivalents and more than $5 billion in free cash flow. This means that EMC has the capacity to reach new technologies through acquisition or internal development. This is extremely important because it faces strong competition from IBM (IBM, Financial), Hitachi HIT, Hewlett-Packard (HPQ, Financial) and younger startups.

The firm has made several acquisitions over the past 15 years. A very important one, was the purchase of VMware, Inc (VMW, Financial). EMC owns 80% of this company, which is the largest provider of server virtualization software. Other important acquisition was the one of Data Domain, which expands EMC's product offerings or the one of Isilon Systems with the aim of growing in the scale-out NAS (network attached storage) market segment.

Revenues and EPS

Looking at profitability, revenues grew by 8.90% and earnings per share increased in the most recent quarter compared to the same quarter a year ago ($0.28 vs $0.27). During the past fiscal year, the company increased its bottom line. It earned $1.33 versus $1.23 in the prior year. This year, Wall Street expects an improvement in earnings ($1.90 versus $1.33).

Margins

The gross profit margin is considered very high, at 69.79%. It has increased from the same quarter the previous year. The net profit margin is ranked higher than 89% of the 2640 Companies in the Data Storage industry.

Profitability

Let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

Ticker Company ROE (%)
EMC EMC Corporation 11.56
HPQ Hewlett-Packard Co 18.69
AAPL Apple Inc 32.60
STX Seagate Technology PLC 52.23
 Industry Median 7.58

The company has a current ROE of 11.56% which is higher than the industry median but lower than the ones exhibit by Hewlett-Packard and Apple (APPL). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels or more, Seagate Technology (STX, Financial) could be the option. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.

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Relative Valuation

In terms of valuation, the stock sells at a trailing P/E of 24.3x, trading at a discount compared to an average of 31.9x for the industry. To use another metric, its price-to-book ratio of 2.7x indicates a premium versus the industry average of 1.64x while the price-to-sales ratio of 2.6x is above the industry average of 0.97x.

As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10,000 five years ago, today you could have $18,235, which represents a 12.8% compound annual growth rate (CAGR).

03May20171244551493833495.png

The stock price increased by 25.09% over the past year.

Final comment

The company has a good ROE, and we saw strengths on earning´s growth, good profit margins and a good increase in the stock price during the past year. This analysis plus its good valuation levels make me feel bullish on this stock.

Hedge fund gurus like Michael Price (Trades, Portfolio) and Louis Moore Bacon (Trades, Portfolio) bought the stock as well as RS Investment Management (Trades, Portfolio). Others gurus like Paul Singer (Trades, Portfolio), Mario Gabelli (Trades, Portfolio), Charles Brandes (Trades, Portfolio), David Rolfe (Trades, Portfolio), John Rogers (Trades, Portfolio), Ken Fisher (Trades, Portfolio) and Sarah Ketterer (Trades, Portfolio) added this stock to their portfolios in the third quarter of 2014, as well as Pioneer Investments (Trades, Portfolio) and Dodge & Cox.

Disclosure: Omar Venerio holds no position in any stocks mentioned