The past year has been all right for the market as a whole, but EMC Corporation (NYSE:EMC) has lagged with the stock down 19% in the last 52 weeks. The $49 billion market cap data storage software and solutions company actually turned in decent financial performance in 2012, with revenue up 9% from the previous year and earnings increasing by 11%, but apparently these numbers disappointed investor expectations. In addition, we’d note that one of the largest increases in expenditures for the company was on R&D, which was increased by 19%; some analysts believe that R&D spending should be partially considered as an investment in the case of technology companies. EMC Corporation (NYSE:EMC) brought in $6.3 billion in cash flow from operations for the year, about half of which was used on capex and acquisitions.
EMC Corporation (NYSE:EMC) currently trades at 19 times trailing earnings, so the market is still expecting considerable earnings growth from the company- though we think that the 11% increase in net income from last year, if it could be sustained for several years, would at least be sufficient for EMC Corporation (NYSE:EMC) to be fairly valued at the current price. Analyst expectations are quite bullish: consensus for 2014 implies a forward P/E of 11. If the company achieved that target very little growth would be required after that point to make EMC Corporation (NYSE:EMC) a value stock, but we would not want to be too dependent on accurate projections from the Street.
We track quarterly 13F filings from hedge funds and other notable investors as part of our work developing investment strategies (for example, we have found that the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year), and can also use our database to see which funds owned EMC Corporation (NYSE:EMC) at the end of December. We can see that Brookside Capital, a hedge fund which is part of the Bain Capital alternative investments organization, reported ownership of 8.1 million shares (see Brookside’s stock picks). Tiger Cub Lee Ainslie’s Maverick Capital initiated a position of 6.4 million shares between October and December (find Ainslie’s favorite stocks).
EMC’s closest peers are NetApp Inc. (NASDAQ:NTAP) and VMware, Inc. (NYSE:VMW). These two stocks each trade at a premium to EMC, though in NetApp’s case the gap is fairly narrow. Specifically, the respective trailing P/Es for NetApp Inc. (NASDAQ:NTAP) and VMware, Inc. (NYSE:VMW) are 25 and 45. Both stocks are also down significantly from their levels a year ago, and both companies are projected to improve their bottom lines over the next couple of years. In NetApp’s case, as at EMC, the forward earnings multiple is in much more reasonable value territory (13, here) and the company’s most recent fiscal quarter did show strong earnings growth versus a year earlier (though revenue was only up slightly). VMware actually had the opposite situation occur: in Q4 2012, revenue grew by over 20% compared to the fourth quarter of 2011 but earnings growth was only modest.
We can also compare EMC to Hewlett-Packard (NYSE:HPQ) and to International Business Machines Corp. (NYSE:IBM), two large companies with significant enterprise software and solutions businesses. HP’s stock price has rallied by over 40% year to date; while the company is certainly struggling, as shown by declining revenue and earnings, the stock is quite cheap according to analyst consensus (the current-year P/E, for example, is 6) and so even a weak year might beat expectations. It might be worth considering as a contrarian/value pick. International Business Machines Corp. (NYSE:IBM) is also not doing particularly well, with revenue about flat in its most recent quarter compared to the same period in the previous year and net income up only modestly. At a trailing earnings multiple of 15, it probably needs to deliver better financials in order to be considered for value status.
EMC is a bit dependent on its projected earnings growth over the next couple of years for our liking, and so it is probably not a good buy until the business starts showing that it can continue to grow its earnings at double-digit rates. Hewlett-Packard looks somewhat more interesting; with that company, there is likely going to be some continued deterioration in the financials but the decline might be limited enough to keep low priced in value terms.
Disclosure: I own no shares of any stocks mentioned in this article.
