Data storage companies thrive less on innovation than they do exploiting the shift to cloud computing. While austerity trends exist within some of the various subsections of IT hardware, data storage companies maintain one of the most attractive secular growth profiles in an environment that gives them high priority. A world-wide explosion of digital content, server virtualization, and expanded regulatory and compliance requirements have made analysts predict the storage hardware market will show explosive growth between 2011 and 2015.
EMC (EMC), a global leader in enabling businesses and service providers to transform their operations and deliver IT services, recently released impressive third quarter results. The company recorded adjusted net income of 40 cents per share versus 34 cents per share estimates and revenue of $5.28 billion versus the $5.29 billion estimates. EMC's revenue has grown during each of the past four quarters on a year-over-year basis, and it climbed 6% from third quarter last year. The company reported net income of $636.34 billion in the quarter, the third in a row of rising net income. EMC's operating cash flow went up 12% year-over-year, while free cash flow rose by 16% year-on-year.
I believe EMC's share price at around $25 a share is a slightly on the high side, but I won't be surprised if it goes up still further in the next few years. While many investors are fretting about lack of profits in some segments of IT hardware, EMC is showing ample capacity to stay at the forefront of the sector, promising growth prospects supported by cheap valuation.
In the third quarter, revenue from EMC's high-end symmetrix storage product portfolio increased 5% compared with a year ago quarter. Revenue from the company's portfolio of mid-tier storage products was flat year-over-year, but there was continued demand for its Isilon scale out NAS products and the company's Backup Recovery System (BRS) portfolio. VMware, EMC's global leader in virtualization and cloud infrastructure, grew revenue year-over-year.
EMC, which has market value of about 30% in the data storage sector, continues to lead with its new product, VPlex, an offering from VMware (VMW). VPlex enhances network availability and utilization and has achieved enhanced and simplified data mobility. MRC Technology, a healthcare technological transfer company and charity, has selected EMC On Demand, a private Cloud Deployment Model for entrepreneur-class applications. VCE, formed by Cisco (CSCO) and EMC with investments from VMware and Intel (INTC), continued to show growth in enterprise data centers and cloud service providers worldwide demand for Vblock systems increasing in the third quarter.
Todd Veredus, one of the largest asset management companies in the world, initiated its position in the company in the quarter. It was last active in the second quarter of 2011 when it sold its shares. Veredus purchased new 770,178 shares as of the end of September, the firm's largest activity on EMC in the past couple of years. To add to the tales of growth, EMC's earnings potential within the next five years is high at an estimated annual rate of 3.98%. The sales of VMware grew by 12.39% per year during the last five years.
To make it better, a group of analysts, led by Kulbinder Garcha at Credit Suisse, opined that the storage hardware market, in which EMC is one of the dominant companies, will grow at a CAGR of 9.3 between now and 2015, with the networked storage market growing faster. Its survey showed that continued prioritization of budget dollars toward storage spending, with over two-thirds of people surveyed listing storage among the top two priorities within consumer IT budget.
Going forward, EMC intends to continue to grow faster than its market, reinvest for the future, and deliver earnings leverage for shareholders. "We remain well positioned to capitalize on - and drive - the transformative trends of cloud computing, Big Data, and trusted IT," says Joe Tucci, EMC's Chairman and Chief Executive Officer, at the third quarter report press briefing.
Not unlike other companies, EMC also has its own share of problems with rivals. There is a struggle going on for the soul of server storage, and EMC and Hewlett-Packard (HPQ) are engaged in a marketing war. To win, HP is turbo-charging its proLiant servers with a smart array containing solid state drives so it can offer superior service than products from EMC's storage operations. HP hopes on using flash storage in its servers as EMC has done and which Dell (DELL) is hoping to do. In other words, apps will be made to complete their work much faster by having data that servers need in the local flash cache when it is needed.
Hewlett-Packard, IBM (IBM) and Hitashi Data Systems are the companies that can best be compared to EMC. At a price-to-sales ratio 2.51, EMC is more expensive than the industry average of 0.87. However, its price-to-earnings ratio at 20.76 is competitive when compared to 14.02 and 17.50 for IBM and the industry average, respectively. In terms of liquidity, EMC's trailing free cash flow margin at 21.4% is significantly above the peer average of just 9.9%. It generated operating cash flow of $144 billion and free cash flow of $1.44 billion, a year-over-year increase of 12% and 16%, respectively. Revenue from the company's products such as RSA Information Security Business is increasing year-over-year, driven by continued customer requirements for trusted IT solutions. I believe that EMC is well-positioned to offer products and services for the exploding data storage business worldwide. Due to its profitability, strong growth potential, and free cash flow, I believe EMC is a solid investment with a possibility to reach new price levels of $30 or higher by the end of 2013.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.