EMC is still a hit, even after its miss
The data company's product cycles and growth capabilities are strong.
By Richard Saintvilus
Weak IT spending continues to be the major inhibitor for EMC (EMC) and other tech companies that are looking to demonstrate growth. Missing on earnings has been the end result.
But the market distributes the punishment evenly. The challenge for investors is trying to figure out which companies are better positioned to capitalize when IT spending resumes. Although its recent earnings would suggest otherwise, EMC might be one of these companies.
For the period ending in September, EMC reported net income of $626.3 million, or 28 cents per share, on revenues of $5.28 billion. Both EPS and revenue climbed 3% and 6% year over year, respectively. However, both missed analysts' estimates of 42 cents per share on revenue of $5.46 billion, according to FactSet.
Even though this is not a company that misses very often, this quarter was not a surprise. Clearly, EMC is not immune to the consequences of weak spending that have affected other tech titans, including IBM (IBM), Microsoft (MSFT) and Cisco (CSCO). Nonetheless, the company seems to doing pretty well in its core operations, as evident in the growth of 3% and 2% in its storage and network storage segments. (Microsoft own and publishes Top Stocks, an MSN Money site.)
Even more impressive was the 5% growth that EMC's high-end storage business produced. But as tends to be the case during tough times, EMC missed estimates on gross margins as a result of its somewhat lethargic pace in revenue.
If there was one bright spot during the quarter, it was virtualization giant VMware (VMW), which is majority-owned by EMC. VMware reported numbers that topped analysts' estimates as the company continues to grow despite the economic slowdown. VMware saw 20% revenue growth as sales reached $1.13 billion and reported net income of 70 cents per share, topping estimates of 63 cents.
EMC benefited greatly from the performance of VMware, which makes up 20% of its revenue. But will this trend continue and will VMware need to exceed expectations to carry EMC?
David Goulden, president and COO, said: "For the third quarter, EMC's business continued to grow faster than overall (technology) spending growth and we gained market share in what turned out to be a more cautionary environment than we expected heading into the quarter."
This statement seems to support the company's weaker-than-expected guidance. EMC says it expects full-year earnings of $1.24 to $1.26 per share, with adjusted earnings coming in the range of $1.68 to $1.70 per share, slightly below estimates of $1.72. Likewise, the company anticipates revenue of $21.60 billion to $21.75 billion, below analyst' estimates of $22.03 billion.
There are a couple of ways to look at this report. The first and obvious way is that it could have been much worse. Even though the company missed estimates, the fact that it continues to grow sales (albeit more slowly than usual) is a good sign. This also indicates the company remains a dominant power within the sector and is gaining market share from rivals such as NetApp (NTAP) and Hewlett-Packard (HPQ).
There is no company in the realm of big data that is better positioned than EMC from the standpoint of its product cycles and growth capabilities.
Astute investors should consider accumulating this stock on weakness, as it remains one of the steadiest performers in the market today. The company is poised to regain its superior sales growth and profitability once IT spending recovers.
Investors should look for this stock to trade at $30 during the course of the next eight to 12 months, even on the most conservative assumptions.
At the time of publication, the author held no position in any of the stocks mentioned.
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