Is EMC a Good Stock to Buy?

Data storage company EMC Corporation (NYSE:EMC) has been looking good so far from a business perspective as we come up on its earnings release for Q3 later this month. It experienced double-digit percentage increases in revenue and in earnings during the second quarter of 2012 compared to the same period in 2011. Sales were up 10% and earnings grew 12%, leaving the company with 29 cents in EPS for the quarter. The first quarter of the year was also successful and so EMC saw its net income come in 21% higher in the first half of 2012 than it had in the first half of last year. Cash flow from operations was also up substantially.

Ken Fisher - FISHER ASSET MANAGEMENT

At a market capitalization of about $54 billion, EMC Corporation trades at a fairly high trailing earnings multiple of 22. It is expected to continue its recent growth rates, however, with Wall Street analysts estimating that it will deliver $1.97 in earnings per share in 2013 (a 15% increase over what analysts currently project for 2012). As a result, its forward P/E is 13. Looking out further, the five-year PEG ratio is 1; this reflects the fact that the sell-side expects EMC’s high growth rate to continue to the point where it is a good value at the current price. EMC also has a decent amount of cash and short-term investments on its balance sheet.

EMC Corporation was one of the stocks on our list of the ten most popular tech stocks among hedge funds for the second quarter (see the full rankings). Among them was Bain Capital’s Brookside Capital; Brookside reported a position of 9.4 million shares at the end of June on its 13F filing, which represented a 38% increase from the beginning of April (research more stock picks from Brookside Capital). Fisher Asset Management, managed by billionaire Ken Fisher, owned 22 million shares of EMC; this made it one of the ten largest positions in its own 13F portfolio by market value (find more of billionaire Ken Fisher’s favorite stocks).

Data storage companies NetApp Inc. (NASDAQ:NTAP) and Brocade Systems, Inc. (NASDAQ:BRCD) make good peers for EMC due to their business. These companies are very similar to EMC in terms of their earnings multiples: NetApp trades at 21 times trailing earnings and 12 times forward earnings estimates while Brocade carries trailing and forward P/Es of 21 and 10, respectively. Therefore, EMC trades at a very small premium by either valuation metric. EMC is about five times larger than NetApp by market cap and much larger than Brocade, and so should trade at something of a premium; we think, if anything, but might be undervalued compared to these two particular companies. In addition, NetApp has seen its numbers decline recently. Brocade’s sales and net income have been up, but given how much smaller a player it is ($2.7 billion market cap) we would rather own EMC, though there is a smaller gap here.

We can also compare EMC to other large technology companies such as Hewlett-Packard Company (NYSE:HPQ) and International Business Machines Corp. (NYSE:IBM). Hewlett-Packard’s PC woes are weighing the company down, and it is actually unprofitable even though the market values its equity at $28 billion. Interestingly, this figure is very low compared to analyst estimates for next year as the forward P/E of 4, but we think that the market is right to be skeptical of what they think. Of course, the fact that the P/E is so low means that the company does not have to meet earnings targets to prove a good value. IBM trades at 12 times forward earnings estimates, about even with EMC, but gets to those earnings numbers through considerably lower growth. Its trailing P/E is 15 and as such has delivered more value up front; however, it’s also safe to say that the tech giant has fewer growth opportunities ahead of it.

We like EMC better than NetApp, and we would feel more comfortable owning it than the smaller Brocade as well. We are keeping an eye on HP for now, waiting to see if it can improve at least a moderate amount and thus become a value play; as of now, there’s still quite a bit of risk there. Against IBM, it’s a judgment call as the two companies seem priced about even relative to each other. EMC certainly has more growth opportunities, but IBM does not require as much growth to justify its current valuation.

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