In this article, let's take a look at EMC Corporation (EMC, Financial), a $60.82 billion market cap company, which is one of the world's largest suppliers of enterprise storage systems.
Cash is king
The company has more than $11 billion in cash and equivalents and more than $5 billion in free cash flow. This means that EMC has the capacity to reach new technologies through acquisition or internal development. This is extremely important because it faces strong competition from IBMÂ (IBM), Hitachi HIT, Hewlett-Packard (HPQ, Financial) and younger startups.
The firm has made several acquisitions over the past 15 years. A very important one was the purchase of VMware, Inc. EMC owns 80% of this company, which is the largest provider of server virtualization software. Another important acquisition was Data Domain, which expands EMC's product offerings or the one of Isilon Systems with the aim of growing in the scale-out NAS (network attached storage) market segment.
Revenues and EPS
Looking at profitability, revenues grew by 8.90% and earnings per share increased by one cent over the year-ago quarter ($0.28 vs $0.27). During the past fiscal year, the company increased its bottom line. It earned $1.33 versus $1.23 in the prior year. This year, Wall Street expects an improvement in earnings ($1.90 versus $1.33).
Margins
The gross profit margin is considered very high, at 69.79%. It has increased from the same quarter the previous year. The net profit margin is ranked higher than 89% of the 2,640 Companies in the Data Storage industry.
Profitability
Let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
Ticker | Company | ROE (%) |
EMC | EMC Corporation | 11.56 |
HPQ | Hewlett-Packard Co | 18.69 |
AAPL | Apple Inc | 32.60 |
STX | Seagate Technology PLC | 52.23 |
 | Industry Median | 7.58 |
The company has a current ROE of 11.56% which is higher than the industry median but lower than the ones exhibit by Hewlett-Packard (HPQ, Financial) and Apple (APPL). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels or more, Seagate Technology (STX, Financial) could be the option. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 24.3x, trading at a discount compared to an average of 31.9x for the industry. To use another metric, its price-to-book ratio of 2.7x indicates a premium versus the industry average of 1.64x while the price-to-sales ratio of 2.6x is above the industry average of 0.97x.
As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10,000 five years ago, today you could have $18,235, which represents a 12.8% compound annual growth rate (CAGR).
The stock price increased by 25.09% over the past year.
Final Comment
The company has a good ROE and we saw strengths on earnings growth, good profit margins and a good increase in the stock price during the past year. This analysis plus its good valuation levels make me feel bullish on this stock.
Hedge fund gurus like Michael Price (Trades, Portfolio) and Louis Moore Bacon (Trades, Portfolio) bought the stock as well as RS Investment Management (Trades, Portfolio). Others gurus like Paul Singer (Trades, Portfolio), Mario Gabelli (Trades, Portfolio), Charles Brandes (Trades, Portfolio), David Rolfe (Trades, Portfolio), John Rogers (Trades, Portfolio), Ken Fisher (Trades, Portfolio) and Sarah Ketterer (Trades, Portfolio) added this stock to their portfolios in the third quarter of 2014, as well as Pioneer Investments (Trades, Portfolio) and Dodge & Cox.
Disclosure: Omar Venerio holds no position in any stocks mentioned