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Wisdom begins at the end.

Daniel Webster

EMC (NYSE:EMC), incorporated in 1979 and headquartered in Hopkinton, Massachusetts, develops, delivers and supports information and virtual infrastructure technologies and solutions. It is the leader in data storage systems and also has a significant presence in the high growth markets of cloud computing. It functions in two segments: EMC information and infrastructure and VMware virtual infrastructure business. 88% percent of 2011 revenues came from the first segment.

It has a very strong balance sheet. As of Dec 2011 cash and cash equivalents (including short term investments) stood at $6.3 billion in contrast to 5.4 billion at the end of 2010. Cash flow surged to $5.6 billion from $4.55 billion in 2010. Free cash flow increased by 29% year over to $4.4 billion in 2011.

One of the major drivers of future growth will come from cloud computing and big data initiatives. Forrester predicts the global market for cloud computing will grow from $40 billion to $241 billion by 2020. Large corporations are projected to increase their IT spending on cloud computers. EMC stands to benefit from this as it already has some influence with large enterprises given its leadership role in the storage market. It will be able to cross market its infrastructure solutions to these enterprises going forward.

EMC repurchased 81.8 million shares in 2011 at a cost of roughly $2 billion and deployed another $700 million to repurchase shares. This should provide an additional boast to earnings going forward.

It is the top provider of storage software and systems. Market research firm IDC indicates that EMC maintained its supremacy in the external storage system, disk storage system and storage software with 28.5%, 28.5% and 41.6% of the market share respectively. It edged out rivals NetApp and IBM.

We are bullish EMC Corporation (EMC) for the following reasons:

EMC's strategic and aggressive acquisition policy has been mainly responsible for the company's strong position in the data-storage market. Acquisitions have helped it enhance and expand its information storage, content management and archiving segments. Management is now focusing on increasing the company's footprint in the very rapidly growing big data-management market.

It benefits from the strategic technology alliances it has with a large number of companies such as Cisco systems, Brocade, Citrix, Microsoft, Oracle and VMware.

The introduction of new product lines such as VNX unified storage, Symmetrix VMAX families and products from Isilon helped drive market share growth.

Gartner predicts IT spending over 2010-2015 periods will be mainly focused on computing hardware of which data storage is a major component. This will help drive future growth and should help it gain significant market share from its peers. Worldwide data center hardware spending is projected to reach $106.4 billion by the end of 2012, and the projections that it will surpass the $127 billion mark by 2015. EMC is well positioned to reap the benefits from this increase in spending going forward.

  • A strong levered free cash flow of $3.06 billion.
  • Year over year projected growth rates of 16.96 and 14.8 for 2012 and 2013 respectively.
  • A great quarterly earnings growth rate of 32%.
  • A good quarterly revenue growth rate of 14%.
  • Strong institutional support; percentage held by institutions is 84%.
  • A decent beta of 1.24 which makes it a good candidate for covered writes; selling covered calls can open up a second stream of income.
  • A 5 year sales growth of 10.89%.
  • A long term debt to equity ratio of 0.01.
  • Net income surged from $1.08 billion in 2009 to $2.4 billion in 2011.
  • EBIITDA increased from $2.63 billion in 2009 to $4.84 billion in 2011.
  • Cash flow per share increased from $1.15 in 2009 to $2.07 in 2011.
  • Sales jumped from $14 billion in 2009 to $17 billion in 2011.
  • Annual EPS before NRI increased from $0.72 in 2007 to $1.25 in 2011.
  • It has projected EPS growth rate for the next 3-5 years of 16%.
  • It sports an excellent interest coverage ratio of 31.39.
  • It has decent current and quick ratio 1.12 and 1.02 respectively.
  • It has a good free cash flow yield of 8.16%.
  • $100K invested for 10 years would have grown to $477K.

Numerous key ratios will be covered in this article and investors would do well to get a grip on some of the more important ones which are dealt with below.

Long-term debt-to-equity ratio is the total long term debt divided by the total equity. The amount of long-term debt a company carries on its balance sheet is very important for it indicates the amount of money a company owes that it doesn't expect to pay off in the next year. A balance sheet that illustrates that long term debt has been decreasing for a few years is a sign that the company is doing well. When debt levels fall, and cash levels increase, the balance sheet is said to be improving and vice versa. If a company has too much debt on its books, it could end up being overwhelmed with interest payments and risk having too little working capital which could in the worst case scenario lead to bankruptcy.

Operating cash flow is generally a better metric than earnings per share because a company can show positive net earnings and still not be able to properly service its debt. The cash flow is what pays the bills.

The payout ratio tells us what portion of the profit is being returned to investors. A payout ratio over 100% indicates that the company is paying out more money to shareholders than they are making. This situation cannot last forever. In general if the company has a high operating cash flow and access to capital markets, they can keep this going on for a while. As companies usually only pay the portion of the debt that is coming due and not the whole debt, this technique/trick can technically be employed to maintain the dividend for some time. If the payout ratio continues to increase, the situation warrants close monitoring as this cannot last forever. If your tolerance for risk is low, look for similar companies with the same or higher yields, but with lower payout ratios. Individuals searching for other ideas might find this article to be of interest - Linn Energy Among Our 5 Attractive Plays To Consider.

Current Ratio is obtained by dividing the current assets by current liabilities. This ratio allows you to see if the company can pay its current debts without potentially jeopardizing future earnings. Ideally the company should have a ratio of 1 or higher.

Price to free cash flow is obtained by dividing the share price by free cash flow per share. Higher ratios are associated with more expensive companies and vice versa. Lower ratios are generally more attractive. If a company generated $400 million in cash flow and then spent $100 million on capital expenditures, then its free cash flow is $300 million. If the share price is $100 and the free cash flow per share is $5, then the company trades at 20 times-free cash flow. This ratio is also useful because it can be used as a comparison to the average within the industry. This gives you an idea of how the company you are interested in holds up to the other companies within the industry.

Levered free cash flow is the amount of cash available to stock holders after interest payments on debt are made. A company with a small amount of debt will only have to spend a modest amount of money on interest payments, which in turn means that there is more money to send to shareholders in the form of dividends and vice versa.

Interest coverage is usually calculated by dividing the earnings before interest and taxes for a period of one year by the interest expenses for the same time period. This ratio informs you of a company's ability to make its interest payments on its outstanding debt. Lower interest coverage ratios indicate that there is a larger debt burden on the company and vice versa. For example if a company has an interest ratio of 11.8, this means that it covers interest expenses 11.8 times with operating profits.

Price to tangible book is obtained by dividing share price by tangible book value per share. The ratio gives investors some idea of whether they are paying too much for what would be left over if the company were to declare bankruptcy immediately. In general stocks that trade at higher price to tangible book value could leave investors facing a great percentage per share loss than those that trade at lower ratios. The price to tangible book value is theoretically the lowest possible price the stock would trade to. Additional key metrics are addressed in this article - EOG Resources Among 5 Plays To Consider.

Company: EMC Corporation

Levered free cash flow = $3.06B

Basic Key ratios

  1. Percentage Held by Insiders = 0.23
  2. Number of Institutional Sellers 12 Weeks = 16

Growth

  1. Net Income ($mil) 12/2011 = 2461
  2. Net Income ($mil) 12/2010 = 1900
  3. Net Income ($mil) 12/2009 = 1088
  4. 12months Net Income this Quarterly/12 months Net Income 4Q's ago = 29.54
  5. Quarterly Net Income this Quarterly/same Quarter year ago = 32.37
  1. EBITDA ($mil) 12/2011 = 4841
  2. EBITDA ($mil) 12/2010 = 3954
  3. EBITDA ($mil) 12/2009 = 2630
  4. Net Income Reported Quarterlytr ($mil) = 832
  5. Annual Net Income this Yr/ Net Income last Yr = 29.54
  6. Cash Flow ($/share) 12/2011 = 2.07
  7. Cash Flow ($/share) 12/2010 = 1.66
  8. Cash Flow ($/share) 12/2009 = 1.15
  1. Sales ($mil) 12/2011 = 20007
  2. Sales ($mil) 12/2010 = 17015
  3. Sales ($mil) 12/2009 = 14026
  1. Annual EPS before NRI 12/2007 = 0.72
  2. Annual EPS before NRI 12/2008 = 0.79
  3. Annual EPS before NRI 12/2009 = 0.62
  4. Annual EPS before NRI 12/2010 = 1.04
  5. Annual EPS before NRI 12/2011 = 1.25

Performance

  1. Percentage Change Price 52 Weeks Relative to S&P 500 = 3.16
  2. Next 3-5 Year Estimate EPS Growth rate = 16
  3. EPS Growth Quarterly(1)/Q(-3) = -175
  4. ROE 5 Year Average 12/2011 = 12.23
  5. ROE 5 Year Average 09/2011 = 12.23
  6. ROE 5 Year Average 06/2011 = 12.21
  7. Return on Investment 06/2011 = 14.55
  8. Debt/Total Cap 5 Year Average 12/2011 = 14.51
  9. Debt/Total Cap 5 Year Average 09/2011 = 14.51
  10. Current Ratio 06/2011 = 1.12
  11. Current Ratio 5 Year Average = 1.83
  12. Quick Ratio = 1.02
  13. Cash Ratio = 0.74
  14. Interest Coverage Quarterly = 31.19

Valuation

  1. Book Value Quarterly = 9.77
  2. Price/ Book = 2.95
  3. Price/ Cash Flow = 13.94
  4. Price/ Sales = 2.98
  5. EV/EBITDA 12 Mo = 11.05

Related companies

For investors looking for other ideas some data has been provided on four additional companies to get you started. Related companies data obtained from barchart.com.

NetApp, Inc. (NASDAQ:NTAP)

Levered Free Cash Flow: $376 million

Net income for the past three years

Net Income 2009 = $64 million

Net Income 2010 = $400 million

Net Income 2011 = $673 million

Total cash flow from operating activities

2009 = $ 889 million

2010 = $ 973 million

2011 = $ 1346 million

Gross Profit

2009 = $1.9 billion

2010 = $2.5 billion

2011 = $ 3.3 billion

Dividend yield 5 year average = N/A

Dividend growth rate 5 year average = N/A

5 year sales growth= 15.59%

Quarterly revenue growth= 21.4%

Quarterly earnings growth= - 35%

Profit margins = 9.82%

Operating margins= 12.63%

Quick Ratio = 2.6

Current Ratio = 2.9

Long term debt to equity= 0.29

Interest Coverage = 11.20

Payout Ratio = N/A

Seagate Technology PLC (NASDAQ:STX)

Levered Free Cash Flow: $741 million

Net income for the past three years

Net Income 2009 = $-31 billion

Net Income 2010 = $1.6 billion

Net Income 2011 = $511 million

Total cash flow from operating activities

2009 = $ 823 million

2010 = $ 1.9 billion

2011 = $ 1.26 billion

Gross Profit

2009 = $ 1.4 billion

2010 = $ 3.2 billion

2011 = $ 2.1 billion

Dividend yield 5 year average = 3.4%

Dividend growth rate 5 year average = 1.7%

5 year sales growth= 0.98

Quarterly revenue growth= 65%

Quarterly earnings growth= 1,132%

Profit margins = 14.7%

Operating margins= 16.8%

Quick Ratio = 1.8

Current Ratio = 23

Long term debt to equity= 0.84

Interest Coverage = 4.9%

Payout Ratio = 18%

Teradata Corporation (NYSE:TDC)

Levered Free Cash Flow: $322 million

Net income for the past three years

Net Income 2009 = $ 254 million

Net Income 2010 = $301 million

Net Income 2011 = $ 353 million

Total cash flow from operating activities

2009 = $ 455 million

2010 = $ 413 million

2011 = $ 513 million

Gross Profit

2009 = $0.938 billion

2010 = $1.08 billion

2011 = $ 1.29 billion

Dividend yield 5 year average = N/A

Dividend growth rate 5 year average = N/A

5 year sales growth= N/A

Quarterly revenue growth= 22%

Quarterly earnings growth= 15%

Profit margins = 14.9%

Operating margins= 19.6%

Quick Ratio = 1.8

Current Ratio = 2.00

Long term debt to equity= 0.19

Interest Coverage = 11.20

Payout Ratio = N/A

Western Digital Corp. (NASDAQ:WDC)

Levered Free Cash Flow: $3585 million

Net income for the past three years

Net Income 2009 = $470 million

Net Income 2010 = $ 1.3billion

Net Income 2011 = $726 million

Total cash flow from operating activities

2009 = $ 1.3 billion

2010 = $ 1.9 billion

2011 = $ 1.6 billion

Gross Profit

2009 = $1.3 billion

2010 = $2.4 billion

2011 = $ 1.79billion

Dividend yield 5 year average = N/A

Dividend growth rate 5 year average = N/A

5 year sales growth= 12.7%

Quarterly revenue growth= -19%

Quarterly earnings growth= - 35%

Profit margins = 7.3%

Operating margins= 10.5%

Quick Ratio = 3.00

Current Ratio = 3.50

Long term debt to equity= 0.01

Interest Coverage = 54.40

Payout Ratio = N/A

Conclusion

Long-term investors should wait for the market to let out some more steam before committing a large amount of money to this market as it is still rather overbought. A pullback in the 7%-12% from the peak would qualify as a strong pullback.

Disclaimer

This list of stocks is meant to serve as a starting point. Please do not treat this as a buying list. It is imperative that you do your due diligence and then determine if any of the above plays meet with your risk tolerance levels. The Latin maxim caveat emptor applies - let the buyer beware.

Source: Data Storage Wars: Bet On EMC, The Decisive Champ

Additional disclosure: EPS, Price, EPS surprise charts obtained from zacks.com. A major portion of the historical data used in this article was obtained from zacks.com. Earning and grow estimates tables sourced from dailyfinance.com. Consensus estimate analysis sourced from reuters.com.