EMC: More Than Storage

Aug.15.12 | About: EMC Corporation (EMC)

Information technology company EMC (NYSE:EMC) is transforming itself from a storage company to one of security, virtualization and storage. EMC's strategy is to help other companies use cloud technologies and Big Data assets for secure environments. The company expects virtualization, storage and security to grow faster than information technology overall.

A large part of for the company's success of late has been a result of its acquisitions. EMC stays abreast of upcoming technologies and companies via a venture capital program. Its acquisition of virtualization company VMware (NYSE:VMW) in 2004 has turned out very well for the company. In the company's Q2 2012 earnings call held on July 24, 2012, EMC reported quarterly year-over-year revenue growth of 10%, but reported VMware related revenue grew at 22%.

The company's acquisition of Isilon Systems in 2010 also appears to be panning out, as EMC noted scale-out storage company Isilon's market segment was the fastest-growing of its mid-tier products during the quarter. The company also noted scale-out storage is one of the hottest areas in storage at the moment.

EMC noted its RSA security product segment grew quarterly revenue at 13% year-over-year and its high-end storage products rebounded in Q2 with quarterly revenue growth of 3% year-over-year. The company indicated hard drive supply shortages related to flooding in Thailand are now in the rear-view mirror.

EMC's quarterly revenue grew 14% year-over-year in North America, 14% in Asia-Pacific-Japan, 2% in Latin America and 20% in Brazil-Russia-India-China plus 13 other countries. On a negative note, the company indicated revenue in Europe, Middle East and Africa was down 1%, which is understandable considering the volatility currently occurring in Europe related to sovereign debt. In Europe, the company saw growth in Northern Europe, but decline in Southern Europe.

EMC shipped a record amount of Flash capacity in Q2 and noted it is developing the most comprehensive Flash portfolio across the storage industry.

EMC has had ten consecutive quarters of double-digit revenue growth, and expects Q3 to be constrained, as September is typically the weakest quarter for Europe, but expects Q4 to be strong. Even with the current global macroeconomic issues and global caution, the company expects to generate $22 in revenue in 2012.

EMC recently announced a partnership with Lenovo, the world's second largest PC company, to jointly develop and market servers and network storage products. The partnership should boost Lenovo's server business and expand EMC's sales channels and product offerings. EMC's partnership with Lenovo should provide the company with better access to China and other developing markets.

EMC's stock price peaked earlier in the year around $30, pulled back to the $23 range in June/July and is currently trading around $26 as shown below:

The stock has support at $23 and also appears to have put in a double bottom at $23.

The prospects for EMC appear bullish, with the company's earnings release in the rear-view mirror, a bull-put credit spread is considered for the company. A bull-put credit spread may be entered for a net credit by selling one put option and purchasing a second put option further out-of-the-money. The goal is for the options to expire worthless and retain the initial net credit as profit.

Using PowerOptions, a variety of bull-put credit spreads for September option expiration are available as shown below:

(click to enlarge)Click to enlarge

The EMC 2012 Sep 22/24 bull-put credit spread looks attractive with a potential return of 13% (124.8% annualized) and a separation between the stock price and the strike price of the short put option of 7.1%. The position can be entered for a net credit of $0.23 by selling the EMC 2012 Sep 24 put option for $0.33 and buying the EMC 2012 Sep 22 put option for $0.10.

EMC Bull-Put Credit Trade

  • Sell EMC 2012 Sep 24 Put at $0.33
  • Buy EMC 2012 Sep 22 Put at $0.10

A profit/loss graph for one contract of the bull-put credit spread is shown below:

(click to enlarge)Click to enlarge

For a stock price greater than the $24 strike price of the short put option at expiration in September of 2012, the position will be fully profitable realizing a 13% return (124.8% annualized). For a stock price below the $22 strike price of the long put option at expiration in September of 2012, the position will result in a total loss, however, the position should be managed prior to realizing a loss.

A management point of $25 is set for the position. If the price of the stock drops below $25, then the position should be managed for an exit or a roll.

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