EMC has many positives in its core business model:
- Low CapEx business model: the company converts almost 80% of its operating cash flow as FCF.
- High operating margin: EMC’s operating margin is ranked higher than 90% of the 234 companies in the
Data Storage
industry. - High EPS growth: EMC’s EPS growth (%)is ranked higher than 85% of the
234
companies in the Data Storage industry - Expanding operating margin: EMC’s operating margin is expanding. Margin expansion is usually a good sign.
Given the pull back in EMC’s shares closer to a big support level of $23 and driven primarily on disappointing guidance for VMW license growth, I believe that EMC’s valuation is attractive and the underlying Information Storage fundamentals remain compelling despite it dependence on enterprises’ willingness to spend. Tepper may think that EMC will benefit from a rebound in spending this year as IT managers under-spent in 2012 and EMC’s storage portfolio is expected to have solid product cycles in 2013 including a VNX refresh according to a recent research from boutique firm Monness Crespi.
Microsoft: the stock is cheap at current levels
Tepper increased his position in Microsoft Corporation (NASDAQ:MSFT) by 179% last quarter. In fact, it is interesting to note that since 2008, Tepper has bought shares or increased his position only at periods when the stock traded in the range between $25 and $27. Last quarter was no exception to that trend as Tepper bought 2 million shares at an average price of $27.
I like Microsoft´s business model and fundamentals, including a very high operating margin of 36.2%, ROE of 35%, continued FCF increases since 2009 and light capex in relation to its operation cash flows. Microsoft continued to produce modest operating income growth and attractive cash generation.
In addition, shares appear to be compellingly priced as the company has a high earnings yield combined with a high ROC.
In the last earnings report, Microsoft reported a solid quarter, highlighted by continued adoption of Windows 8 (>60 million sold), Server & Tools and Bing Search monetization. In the call, management expressed that enterprise demand remains healthy, as customers continue to add products and additional seats to their enterprise agreements. I like Microsoft’s Surface tablet and the company is ramping production to market the tablet in 14 additional countries in the upcoming quarter.
I think that Microsoft does offer a reasonable margin of safety at its current price of $27.50 and could be an attractive opportunity for investors that bet on the potential growth that Microsoft could achieve in both cloud computing (Office 360) and its own hardware products (Surface, Phones, etc).
The article 3 Unique Companies at Undervalued Prices originally appeared on Fool.com and is written by Laura Paur.
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