EMC Corporation (EMC) and Activision Blizzard, Inc. (ATVI) are two solid technology companies, both with high margins and inexpensive cash flow, as well as healthy balance sheets. Both stocks are currently trading below analysts' target prices and received positive updates from analysts recently. EMC and ATVI will be analyzed fundamentally and technically in this article. Investing strategies will also be presented.
EMC is a leading provider for hardware, software and services for enterprise network storage. EMC holds 80% ownership of outstanding shares in VMWare (VMW), the largest global vendor providing virtualization software for server operating systems. EMC was down 1.70% and closed at $23.74 on March 25, 2013. EMC had been trading in the range of $22.75-$30.00 in the past 52 weeks. EMC has a market cap of $49.96B with a beta of 1.02. EMC remains a great long-term buy for its attractive cash flow despite the short-term pullback.
On March 11, 2013, Longbow Research initiated coverage on EMC with a buy rating and a target price of $30.00. Analysts currently have a mean target price of $29.47 and a median target price of $30.00, suggesting 24.14%-26.37% upside potential. Analysts, on average, are estimating an EPS of $0.39 with revenue of $5.42B for the current quarter ending in March, 2013. For 2013, analysts are projecting an EPS of $1.86 with revenue of $23.47B, which is 8.10% higher than 2012.
On March 13, 2013, EMC's CEO Joe Tucci revealed the company's plan to spin out a new equity, known as "the Pivotal initiative," which focuses on big data, cloud computer, and data analytics. As reported, EMC will own 69% of the new entity VMW will own the other 31% of Pivotal. Pivotal will incorporate EMC's Greenplum and Pivotal Labs acquisitions while VMware will put in its Cloud Foundry, Cetas, Spring and Gemfire groups. Pivotal is expected to have $300M in revenue this year.
There are a few positive factors for EMC:
- Higher revenue growth (3-year average) of 15.7 (vs. the industry average of 5.9)
- Higher operating margin of 18.3% and net margin of 12.6% (vs. the industry averages of 12.0% and 8.9%)
- Lower P/E of 19.6 (vs. the industry average of 24.)
- Lower Forward P/E of 11.8 (vs. the S&P 500's average of 13.9)
- EMC has a total cash of $6.17B and a total debt of $1.71B with a book value of $10.61 per share
- EMC generates an operating cash flow of $6.26B with a levered free cash flow of $4.68B (low P/FCF of 9.93)
Technically, the MACD (12, 26, 9) indicator just turned to show a bearish trend on the last trading day. The momentum indicator, RSI (14), is declining and indicating a bearish lean at 42.68. EMC is currently trading below its 200-day MA of $25.16 and 50-day MA of $24.28. The next support is $22.19, the S1 pivot point, followed by $21.37, the S2 pivot point, as seen from the chart below.
How to Invest
EMC is technically bearish in the short-term. However, EMC remains a great long-term buy with estimated 13.26% annual EPS growth for the next 5 years and its inexpensive cash flow (P/FCF of 9.93). Investors can review setting up the long-term position once MACD and RSI start to stabilize and reverse the bearish trend. Upon seeing further price stabilization, a credit put option spread of June 22, 2013 $20/$22 put can be reviewed. Investors can also review the following ETFs to gain exposure to EMC:
- Dow Jones U.S. Technology Index Fund (IYW), 2.18% weighting
- Information Tech ETF (VGT), 1.88% weighting
Activision Blizzard, Inc.
Activision Blizzard publishes interactive entertainment products globally. ATVI was up 0.07% and closed at $14.35 on March 25, 2013. ATVI had been trading in the range of $10.45-$15.08 in the past 52 weeks. ATVI has a market cap of $15.95B with a low beta of 0.56. ATVI remains a solid buy at current valuation.
On March 15, 2013, Stifel Nicolaus reiterated a buy rating with a target price of $17 (from $15 previously) for ATVI. Analysts currently have a mean target price of $15.89 and a median target price of $16.00 for ATVI, suggesting 10.73%-11.50% upside potential. Analysts, on average, are estimating an EPS of $0.11 with revenue of $705.51M for the current quarter ending in March, 2013. For 2013, analysts are projecting an EPS of $0.86 with revenue of $4.26B, which is 14.50% lower than 2012. However, analyst are predicting an EPS of $1.03 with revenue of $4.66B, which is 9.40% higher than 2013.
On March 22, 2013, ATVI presented the new "Hearthstone: Heroes of Warcraft," a new cross-platform free-to-play game for Windows, Macintosh, and iPad. This is this first game designed for the growing F2P (free-to-play) business model, where 77% of gamers are spending more time than traditional pay-to-play games, as reported by John Gaudiosi from Forbes. It is also the company's first game designed for cross-platform on mobile devices (Apple (AAPL)'s iPad). This is a good indication that ATVI is adapting to the mobile and F2P trends.
There are a few positive factors for ATVI:
- Higher revenue growth (3-year average) of 4.3 (vs. the industry average of 0.7)
- Higher operating margin of 29.9% and net margin of 23.7% (vs. the industry averages of 3.3% and 8.3%)
- Stronger ROE of 10.5 (vs. the average of 7.8)
- Lower P/E and P/B of 14.2 and 1.4 (vs. the industry averages of 25.4 and 1.6)
- Lower Forward P/E of 12.5 (vs. the S&P 500's average of 13.9)
- ATVI has a total cash of $4.38B and zero total debt with a book value of $10.18 per share
- ATVI generates an operating cash flow of $1.34B with a levered free cash flow of $1.34B (low P/FCF of 12.56)
- ATVI currently offers an annual dividend yield of 1.32%
Technically, the MACD (12, 26, 9) indicator is showing bearish trend, but the MACD difference continues to converge. RSI (14) is picking up and indicating a bullish lean at 57.88. ATVI is currently trading above its 50-day MA of $13.12 and 200-day MA of $11.79. The next resistance is $15.33, the R1 pivot point, followed by $16.54, the R2 pivot point, as seen from the chart below.
How to Invest
With ATVI's inexpensive cash flow (P/FCF of 12.56), estimated 10.34% annual EPS growth for the next 5 years, and strong cash position (zero total debt), ATVI remains a good buy at current valuation (Forward P/E of 12.5). For bullish investors, a credit put option spread of May 18, 2013 $11/$13 put can be reviewed, which will allow investors to gain some upside credit premium or to acquire ATVI stock at a price below $13 upon options expiration.
Note: All prices are quoted from the closing of March 25, 2013. Investors and traders are recommended to do their own due diligence and research before making any trading/investing decisions.