ModernGraham Valuation Of EMC Corporation

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Here is a look at how EMC Corporation (EMC) fares in ModernGraham's opinion, based on an updated and modernized version of Benjamin Graham's requirements of defensive and enterprising investors from The Intelligent Investor:

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor - must pass at least 6 of the following 7 tests: Score = 4/7

  1. Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
  2. Sufficiently Strong Financial Condition - current ratio greater than 2 - FAIL
  3. Earnings Stability - positive earnings per share for at least 10 straight years - PASS
  4. Dividend Record - has paid a dividend for at least 10 straight years - FAIL
  5. Earnings Growth - earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - PASS
  6. Moderate PEmg ratio - PEmg is less than 20 - FAIL
  7. Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50 - PASS

Enterprising Investor - must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5

  1. Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - PASS
  2. Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - PASS
  3. Earnings Stability - positive earnings per share for at least 5 years - PASS
  4. Dividend Record - currently pays a dividend - PASS
  5. Earnings growth - EPSmg greater than 5 years ago - PASS

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

MG Value $40.89
MG Opinion Undervalued
Value Based on 3% Growth $16.68
Value Based on 0% Growth $9.78
Market Implied Growth Rate 5.98%
Net Current Asset Value (NCAV) -$2.84
PEmg 20.46
Current Ratio 1.53
PB Ratio 2.17
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Balance Sheet - 9/30/2013

Current Assets $16,447,000,000
Current Liabilities $10,759,000,000
Total Debt $5,493,000,000
Total Assets $44,602,000,000
Intangible Assets $16,137,000,000
Total Liabilities $22,285,000,000
Outstanding Shares 2,058,000,000
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Earnings Per Share

2013 (estimate) $1.34
2012 $1.24
2011 $1.10
2010 $0.88
2009 $0.53
2008 $0.64
2007 $0.77
2006 $0.54
2005 $0.47
2004 $0.36
2003 $0.22
2002 -$0.05
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Earnings Per Share - Modern Graham

2013 (estimate) $1.15
2012 $1.00
2011 $0.84
2010 $0.70
2009 $0.60
2008 $0.61
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Conclusion:

EMC Corporation is a very attractive company at the moment. The company does not qualify for the Defensive Investor, due to a current ratio that isn't quite high enough, lack of a strong dividend history, and a high PEmg ratio. However, the company does qualify for the Enterprising Investor after passing all five requirements for the investor type. As a result, Enterprising Investors should proceed with further research, such as by reviewing the ModernGraham Valuation of International Business Machines (NYSE:IBM). From a valuation perspective, the company has grown EPSmg (normalized earnings) from $0.61 in 2008 to an estimated $1.15 for 2013. This is a solid level of growth that has been very consistent and is greater than the market's current implied estimate for growth of 5.98%. Therefore, it would appear that EMC Corporation is undervalued.

Disclosure: The author did not hold a position in EMC Corporation (EMC) at the time of publication and had no intention of entering into a position within the next 72 hours.