EMC Corporation (EMC) develops data storage systems and software. With a market capitalization of $50 billion EMC ranks before its competitors Hewlett-Packard (HPQ) with $37 billion and behind IBM (IBM) with $215 billion.
EMC is down about 20% this quarter and investors are discounting the fundamentally good positioning of the company and its performance. Specifically, investors should consider and re-value the following reasons for a long investment:
- EMS is an undervalued tech company with an earnings yield of 8.3% and high profitability
- EMC is strongly positioned in the cloud industry, which is growing fast
- It is partnering with Verizon to develop private cloud computing platforms which will add growth to top and bottom line
- EMC is accessing the fast growing (& innovative) Chinese market
- Well capitalized with net cash position of $4.6 billion
- Transparency in earnings
Despite these convincing items for the worlds largest data storage manufacturer, bears are keeping a lid on the stock price: The stock is down 12% over the year. The valuation and the underlying profitability metrics indicate much more potential for EMC:
EMC has a forward P/E of only 12 despite having a gross margin of 61% higher than HPQ's 23% and IBM's 47%. The return on equity stands at 14% and shows that the company can increase shareholder value and earn way more than its capital costs. Leverage ratios are practically not applicable as the company has about $6.34 billion in total cash and total debt of $1.72 billion leaving the company with a net cash position of $4.6 billion.
In addition, EMC is working with Verizon to develop private cloud computing platforms manifesting its strategy to penetrate this key segment more aggressively. I predict, that the majority of EPS growth will be attributable to this sector.
Overall, a company that is on top of its industry with a fortress balance sheet, strong cash flow and EPS growth of 25% this year, should not be trading at a multiple of 12. I consider a multiple of 16 more appropriate given the key performance indicators above. Analysts estimate a 2013 average EPS of $1.98 which yields an intrinsic value estimate of $31.68. Correspondingly, I rate EMC a BUY and recommend the company for long-term oriented investors who bet on EMC being able to capitalize on the cloud computing trend.
EMC is currently in the process of building out a downward trending canal with a lower bound hitting $21 a share. If the stock price rebounds at $21 this trend canal will be reaffirmed with the stock having an immediate upside potential to $24. The mark of $24 is crucial: Can EMC break this mark, the short-term down trend canal will be dominated by the longer-dated upward trending canal. In this case the stock could find good support at this level waiting for momentum to build to send the stock higher.