EMC Corp. - Valuation And A Strong Financial Position Could Be Future Drivers

| About: Dell Technologies (DVMT)

EMC Corporation (EMC) continues to move along, with results being driven by its highly successful stake in VMware (NYSE:VMW). Over the past year shares have gone nowhere, missing out on the large market rally.

The strong financial position and reasonable valuation allows for greater payouts to investors, or possibly shareholder activism to accelerate this process. Of course, shares could also see a steady increase in its stock price.

Fourth-Quarter Highlights

EMC generated fourth-quarter revenues of $6.68 billion which is up by 10.8% compared to last year. Consensus estimates for revenues stood at $6.62 billion.

Reported GAAP earnings came in at $1.02 billion. As a result of modest share repurchases, earnings per share growth was stronger. Reported earnings per share rose by 23.1% to $0.48 per share.

Non-GAAP earnings came in at $0.60 per share, beating consensus estimates by a penny.

What's Driving Earnings Growth?

Reported revenue growth was aided by both product sales as well as service sales. VMware's revenues were up by 16% as reported by the company itself to $1.46 billion. Information infrastructure revenues rose by 10% to $5.13 billion, while it is very disappointing to see a 6% drop in Pivotal revenues to $91 million. Within the information infrastructure segment, the emerging storage business performed really strong, increasing revenues by 73% to $0.56 billion.

Strong operating leverage, notably in terms of cost control for research & development expenses, as well as selling, general and administrative expenses boosted earnings.

Despite gross margin pressure, EMC managed to boost operating earnings by 80 basis points to 21.8% of total revenues. Combined with lower tax rates this resulted in strong earnings growth of 17.5%. Earnings per share saw an additional boost as the company repurchased roughly 4% of its shares outstanding over the past year.

A Look Back At 2013

EMC ended the year on a solid note, its balance sheet is especially rock solid. The company ended the year with $17.6 billion in cash, equivalents and short-term investments, while operating with a net cash position north of $10 billion.

Full-year revenues for 2013 came in at $23.2 billion, up nearly 7% on the year before. Earnings rose by nearly 6% to $2.9 billion with growth driven by the Pivotal project, despite the relative weak final quarter and the strong performance of VMware.


For the current year, EMC sees revenues of $24.5 billion, up by 5.6% on the year before. First-quarter revenues are expected to make up 22% of those revenues, suggesting revenues of $5.4 billion. Notably the first-quarter guidance is soft, as consensus estimates stood at $5.81 billion.

This means that revenues are seen roughly flat for the first quarter, and this is a bit of a disappointment. Full-year GAAP earnings are seen around $1.38 per share, while non-GAAP earnings are seen at $1.95 per share. Consensus estimates for full year non-GAAP earnings stood at $2.04 per share.

First-quarter GAAP earnings are seen at $0.19 per share on non-GAAP earnings of $0.35 per share. Analysts were looking for non-GAAP earnings of $0.43 per share.

To offset some of the pain of the weaker guidance, EMC sees another $2 billion in share repurchases for the coming year.

Capital Allocation

To please its investors and use some of its sizable cash positions, EMC initiated a $0.10 per share quarterly dividend over the past year. This costs the company little over $800 million per annum, providing investors with a 1.6% dividend yield.

As part of its long-term capital allocation plan, another 25-30% of free cash flows are targeted to be returned to investors through share repurchases.

Combined payouts of dividends and share repurchases are seen around 50% of free cash flows, providing investors with a roughly 3% combined yield per annum.

Takeaway For Investors

EMC remains well focused on the long-term mega trends of mobile, cloud, big data and social, among others. These trends have a huge impact on the business, but EMC and its partners have embraced the vision and strategy to capitalize on these opportunities.

Back in October, I took a look at the valuation and implications for shareholders. I noticed that EMC's shareholders should applaud management for acquiring VMware back in 2004. Shares rose from $10-15 at the start of the decade to $20-$30 in recent years.

Both revenues and notably earnings growth in recent years has been very strong, as EMC continues to hold a 79.5% stake in VMware. The strong performance of VMware versus EMC offered an interesting relative arbitrage opportunity in my eyes at the time.

Ever since, the divergence between both companies has increased even further, making such a "relative" arbitrage even more interesting. Alternatively, an outright long position in EMC might be appealing as well, as the company is stepping up returns to shareholder while it trades at reasonably attractive earnings multiples, after backing out the cash position of the firm.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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