EMC (NYSE:EMC) is, undoubtedly, the market leader in external data storage systems. At least according to the Worldwide Quarterly Disk Storage Systems Tracker that has EMC in first place in factory revenue for the 15th year running. More than this, through 2011 it had more than twice the revenue of its nearest rival in this data storage sector, IBM, and gained 3.5% of market share.
It hasn’t all been plain sailing for EMC, as it sees competition growing. In some respects, it’s the old timer trying to keep the newer, more flexible young guns from knocking on its door. Companies like NetApp (NASDAQ:NTAP) are entering the market with some force, and look attractive with aggressive sales leading to fast improving earnings. Indeed, NetApp is pencilled in for growth in earnings per share of around 15% to 20% between 2012 and 2013, though trading at a trailing price to earnings ratio of 29 such growth is more than accounted for in its share price of $44.
At the other end of the scale, rivals such as IBM, four times larger by market capitalization, are trying to take the fight to EMC. Last year, it was a leading light in forming the Open Virtualization Alliance with the aim of promoting the alternative Kernel based Virtual Machine (KVM) in preference to EMC’s data storage offering. So far, EMC’s performance has belittled IBM’s strategy. Indeed, whilst EMC’s market share has grown, IBM’s has shrunk by over 1.5%.
In a further twist, Dell (NASDAQ:DELL) cut its ties with EMC back in October last year. Though this move had been expected by the market: Dell’s acquisitions of data storage companies over the past few years – including EqualLogic and Compellent – made the partnership between EMC and Dell a bad deal for Dell.
Dell had been a reseller of EMC hardware for ten years, but cut its ties with EMC two years before the formal partnership had been due to come to an end.
Despite this move, however, EMC has continued to prosper.
EMC has said that its terrific performance has stemmed from global acceptance of its storage portfolio, which allows customers to take full advantage of cloud computing. EMC’s product suite is able to integrate to a fuller extent and give greater capacity than those of its rivals. To get to this level of acceptance, EMC has spent over $10 billion on research and development and $14 billion on acquisitions over the last ten years. This includes the $2.2 billion it paid to take Isilion into the EMC fold back in 2010.
It’s not only Dell and EMC who have been acquisitive in the data storage space. Hewlett Packard (NYSE:HP) bought 3Par for $2.4 billion in 2010, and IBM bought Netezza around the same time.
But it’s not just acquisitions that have enhanced EMC’s position. It’s also the way it sells its products.
EMC uses partners to sell its products. In 2011, it added 1700 of these and was richly rewarded. In the fourth quarter of 2011, EMC reported record quarterly profits, as well as record full year numbers for the second year running. Revenue for the year increased by 20%, and earnings per share improved by 25% to $1.10. Operating sash flow, at $5.7 billion, increased by 25% year on year. At year end, the company had over $10.5 billion of cash and equivalents on its balance sheet.
It expects more of the same for 2012, with revenue set to increase by 10%, and earnings to increase to $1.24 per share. It does expect the tax rate to edge up, from 19% to 21%, but it is also penciling in a repurchase of $700 million of its common shares.
Analysts have a mean 12-month target of $31.18 for the shares, an upside of around 7.5% from today’s level.
Looking at the long-term chart, not since 2002 have the shares traded at current levels. But with revenue and profits at all time highs, it is hard to argue that they should move lower. Indeed, while it would be folly to think that the shares could trade at price to earnings multiples seen during the dot.com bubble, there is certainly a momentum building that could see the price move to the mid $30’s, perhaps even as high as $40. A word of warning: there may be a pull back before this move is made, as the market attempts to shake out loose holders.
In summary, the company is adding market share in its target markets, as its sale force captures new customers. This is leading to increasing revenues and margins are holding up, while the company keeps costs under control. BUY.
About the author:
I practice Judaism and my faith is very important to me. I visit family in Israel once a year, but I am educated and work in the United States where I hold an MBA and a bachelor’s in English. I am a patient man, enjoy wine but am not a connoisseur, and I listen more than I speak.