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Summary

  • Consider, the majority of analysts who cover the company, 84% of them rate EMC as a buy with a median target of $30 per share. The highest target is $36.
  • I believe that here is no company better positioned to capitalize on a recovery in IT spending.
  • With the stock trading at around $26 per share, there's at least 20% of upside to these shares in the next 6-to-12 months, which puts fair value right around $32.

Investing in the companies that rely on enterprise IT spending has not been an easy thing to do. This is regardless of how well-managed their balance sheets may appear. Although EMC is still the clear-cut leader in the data storage industry, well ahead of rival NetApp (NASDAQ:NTAP), EMC has struggled to post the sort of growth that investors have come to expect. But it isn't because management hasn't tried.

As with other enterprise giants like Cisco (NASDAQ:CSCO), EMC has shown no immunity to weak IT spending. And with the company due to report first-quarter earnings Wednesday, investors are looking for confirmation that EMC can still deliver the goods. If not now, investors want assurances that they've stored their faith in the right company.

Although enterprise spending isn't expected to return to robust levels anytime soon, analysts still appear mostly positive about what EMC might report. This is even though the Street expects a slight dip in profits. The consensus earnings per share estimate is 27 cents per share, which has remained steady over the past month. Analysts are expecting earnings of $1.61 per share for the fiscal year.

EMC investors grew anxious recently since estimates have declined 7 cents since the company's reported its fourth-quarter results. But estimates have also dropped for NetApp. This tells me that analysts are becoming more realistic about the state of the enterprise. The results from Cisco and Hewlett-Packard (NYSE:HPQ) suggest that, although there has been moderate improvements, corporations are still holding firm to those purse strings. But they can't starve themselves forever.

Despite the unassuming results, EMC management knows how to grow the bottom line. In fact, the company has grown profits for eight consecutive quarters. Even more impressive, in the last four quarters, management has grown profits by close to 20% year over year, including a 76% surge in the January quarter. Now, this does not happen at poor companies.

In terms of revenue, the Street will be looking for $5.43 billion for the quarter, which represent just 1% year-over-year growth. Last year, EMC posted revenue of $5.39 billion. For the year, revenue is projected to come in at $24.51 billion. As with the strong record of profitability, over the past four quarters, EMC has posted an average of 10% year-over-year revenue growth, including a 24% spike in January.

I'm not saying this is the same EMC that we saw at the height of the "Big Data" craze two years ago. Critics need to consider how the company could have performed so strongly in perceived weak segments. And it would serve investors well to become a bit more realistic about the current macro conditions.

From my vantage point, I can't see any reason to be hesitant about taking a position here ahead of tomorrow's results. The absolute numbers aside, the more important question is, when enterprise spending does recover, to what extent can EMC management claim the lion's share of the market? Well, it seems they've been doing an excellent job of answering that question.

Investors have to be encouraged by how management is able to adapt to changing trends. EMC's improving product cycles and growth capabilities give investors plenty of reasons for optimism, especially since the total available market for Big Data is projected to grow to $17 billion by 2016. From an investment perspective, I see a stock that is still trading at a discount to its fair market value.

Consider, the majority of analysts who cover the company, 84% of them rate EMC as a buy with a median target of $30 per share. The highest target is $36 per share. I believe that here is no company better positioned to capitalize on a recovery in IT spending. With the stock trading at around $26 per share, there's at least 20% of upside to these shares in the next 6-to-12 months, which puts fair value right around $32.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by Wall Street Playbook's tech sector analyst. Wall Street Playbook is not receiving compensation for it (other than from Seeking Alpha). Wall Street Playbook has no business relationship with any company whose stock is mentioned in this article.

Source: Why EMC Is Heading To $32