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January 24, 2012

Strong Quarter for EMC Justifies Growth Story

EMC Corporation (EMC) reported better than expected 4Q11 results. Revenues of $5.57 billion and EPS of 49 cents exceeded consensus estimates of $5.49 billion and 46 cents, respectively. The company provided detailed 2012 guidance in line with street estimates. Revenues are forecast at $22 billion, up 10%, with EPS forecast at $1.70, up 13%. Given plenty of headwinds (Thailand floods, Europe economy, currency, assumed big slowdown in share buybacks), the guidance is quite solid. In fact, it looks conservative coming off much higher revenue growth and share repurchases in 4Q11 and 2011.

The latest results are the second consecutive quarter where EMC exceeded expectations while facing a skeptical street and lots of headwinds to the business. I think this suggests that EMC's core story as a play on Big Data and Cloud is intact. Given the high priority of spending on storage and virtualization, this consistent execution should result in a higher multiple for the shares.

EMC enjoyed strength across most its business lines. Large enterprises continue to spend on storage despite a generally tepid overall IT spending environment. EMC is seeing accelerating growth in small and midsize companies, a sign that complex storage needs are growing and EMC's total addressable market is broadening.

EMC trades at just 14 times earnings unadjusted for its large cash balance and 80% ownership in VMWare (VMW). VMW also reported outstanding earnings and its shares are enjoying a 7% pop so far this morning. EMC trades at single digit multiple on its core business, much too low for what is likely to be sustained mid-teens growth. A price of $28-30 seems reasonable.

Disclosure: EMC is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg's personal accounts. Steve is sole proprietor of Northlake, an SEC registered investment advisor.

Posted by Steve Birenberg at January 24, 2012 09:41 AM in EMC