EMC Is A Strong Buy On New Growth Catalyst

|
 |  About: EMC Corporation (EMC)
by: IncomeHunter

EMC, which announced a broad partnership with Lenovo in August, has finalized the arrangement. The partnership expands EMC's reach in China and other high-growth markets. The strategic partnership will support the development of new servers and networked storage systems built by EMC's former Iomega division.

According to Eric Arcese, general manager of LenovoEMC, "Lenovo's record as one of the fastest-growing technology companies in the world and Iomega's heritage as a leader in network storage solutions enables the joint venture to pursue growth opportunities and drive innovation in the SMB NAS market." EMC has been trading at price multiples that are reasonable for profitable investing. In this article, I will explain how this partnership will make EMC more attractive for investors.

How are EMC's initiatives increasing sales?

The trend is put on consumers' desire for a new generation of applications to be installed in a secure and trusted way. EMC, through its partnerships and acquisitions, has become a driver in this transformation process, installing big data applications, cloud computing, and trusted IT to gain competitive advantage over its rivals. EMC has been holding regular meetings with solution vendors to unveil programs that will push sales and services in all but a handful of its top accounts.

In the second quarter, EMC's net income increased 19% year-over-year to $650 million. Second quarter earnings per diluted share increased 21% year-over-year to $0.29. EMC generated operating cash flow of $1.24 billion and free cash flow of $958 million, a year-over-year increase of 16% and 76%, respectively. Operating cash flow went up 16% year-over-year, while free cash flow increased by 36%.

"I am pleased with EMC's execution and record second quarter financial performance. We are seeing a transformation in the IT industry unlike anything we have seen before. Organizations are moving quickly to adopt cloud computing and take advantage of both the efficiency and agility that comes with running IT-as-a-Service," said EMC's CEO Joe Tucci.

During 2012, EMC implemented many partnership and acquisition deals. In March, EMC bought San Francisco-based Pivotal Labs in an all-cash deal. In June, it bought XtremIO, an Israeli flash start-up company, with a reported price tag of $400 to $500 million. EMC acquired Syncplicity, an early Dropbox competitor. A few weeks later, EMC acquired Montreal-based Watch4net, a privately-held provider of enterprise performance management software. Through VCE, a company formed in a partnership with Cisco (NASDAQ:CSCO), EMC continued to gain traction in the enterprise data centers and cloud service providers globally.

EMC reported third quarter consolidated revenue of $5.28 billion, an increase of 6% compared with the same quarter of 2011. Consolidated revenue from U.S. operations increased 8% year-over-year to $2.9 billion, representing 55% of consolidated third quarter revenue. Earnings from EMC's business operations outside of the U.S. increased 4% year-over-year to $2.4 billion, and represented 45% of consolidated third quarter revenue.

Third quarter non-GAAP earnings were $0.40 per share, an increase of 8% year-over-year. During the quarter, it generated operating cash flow of $1.44 billion and free cash flow of $1.14 billion, a year-over-year increase of 12% and 16% respectively. The company ended the quarter with $10.6 billion in cash and investment.

"EMC's third quarter revenues and profit growth reflect the resiliency of our business in a more uncertain global economic environment. We remain well positioned to capitalize on - and drive - the transformation trends of cloud computing, Big Data, and trusted IT," said Tucci.

The partnership with Lenovo represents a powerful opportunity for EMC to expand its presence in China, a vibrant market, and extend it to other parts of the world. It is seen as a strong strategic fit, leveraging the two companies' respective strengths across three main supply chains. "We're excited to partner with Lenovo as we focus our combined energies serving a broader range of customers with industry-leading storage and server solutions," said Tucci.

If we relate EMC's partnerships and acquisitions to its recent financial statements, it is clear EMC has improved its position compared to last year.

Peer Comparison

With a gross margin of 0.62%, compared with 0.23% for Hewlett-Packard (NYSE:HPQ), 0.48 for IBM (NYSE:IBM), and 0.23 for Alcatel-Lucent (ALU), and an EPS of 1.22, compared with -6.14 for Hewlett-Packard, 0.36 for Juniper (NYSE:JNPR) and 0.49 for Alcatel-Lucent, EMC is ahead of its peers.

Conclusion

EMC is overperforming in the IT sector. Looking at EMC's partnerships and acquisitions and the improving margins, I can say that EMC is a solid investment at the moment.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.