Data storage, infrastructure, and security company EMC Corporation (NYSE:EMC) has been left out of the stock market’s rise year to date, with its current stock price at about the same levels as the beginning of 2013 while the S&P 500 has risen about 15%. This is in part due to higher costs in the first quarter of 2013, which caused pretax income to be essentially flat versus a year earlier after adding back restructuring and acquisition related items, even as the company’s revenue grew by 6%. EMC Corporation (NYSE:EMC) generated $1.7 billion in cash flow from operations during the quarter; the primary use of this case was to repurchase both its own shares and those of its subsidiary VMware, Inc. (NYSE:VMW) (a portion of VMware’s stock trades separately in the market).
Wall Street analysts expect EMC Corporation (NYSE:EMC) to earn $1.86 for 2013, which would imply a current-year P/E multiple of 13. We saw in the company’s most recent 10-Q that business did not appear particularly strong, but if EMC continues to buy back shares with its cash that would reduce share count. We’d still prefer if the company were growing its earnings rather than just using repurchases to grow EPS, however. The sell-side doesn’t seem to be expecting much of an increase in net income, with their forecasts only showing small improvements in earnings per share. As a result, we wouldn’t consider EMC Corporation (NYSE:EMC) a value stock right now just because of the stagnant performance- if further results convinced us that profits themselves might rise, then any reduction in share count could leverage that earnings growth nicely.
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VMware has been growing its revenues at a slightly higher rate than EMC, going by its own quarterly report, though again even after addbacks we see little change in pretax income. Markets are valuing the stock at a premium to its parent; for example, the current-year P/E here is 22. With business conditions not seeming much different at VMware, we’d avoid it. We’d also note that 12% of the float is held short- market players may be pair trading EMC against VMware.