EMC is still a hit, even after its miss

The data company's product cycles and growth capabilities are strong.

By TheStreet Staff Nov 8, 2012 1:24PM

Technician working on a network server copyright Purestock, Purestock, Getty ImagesBy 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.

 
Headwinds

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.

 

Moving forward

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).

 
Bottom line

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.

 

 

More from TheStreet.com

1Comment
Nov 8, 2012 5:17PM
avatar
Why is this news?  EMC had their earnings call on 10/24?  The title of this article is very misleading and looks suspiciously like the title was chosen to mislead the sheeple.
Report
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
Categories
100 character limit
Are you sure you want to delete this comment?

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

113
113 rated 1
279
279 rated 2
416
416 rated 3
647
647 rated 4
548
548 rated 5
513
513 rated 6
669
669 rated 7
516
516 rated 8
317
317 rated 9
113
113 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
KOGKODIAK OIL & GAS Corp10
UPLULTRA PETROLEUM Corp10
TAT&T Inc9
COPCONOCOPHILLIPS9
DVNDEVON ENERGY CORPORATION9
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.