Is EMC’s Stock a Sell After These Earnings?

The days of storing data on USB drives are over as cloud computing has begun to dominate information storage. The convenience, the safety, and the versatility of cloud storage have developers creating systems for personal and professional use. While these systems rapidly redefine how we manage data, these information technology companies are gaining attention in their respective market. One notable company is EMC Corporation (NYSE:EMC) that develops information infrastructure technologies to efficiently manage the increasing amounts of data stored by companies for a low-cost. Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

EMC’s reported Q3 sales were lighter than expected, which in turn led to an adjustment in the outlook for non-GAAP EPS in FY12. However, taking all things into consideration, EMC demonstrated solid execution in a difficult macro-economic environment and outperformed peer companies. While not immune, EMC’s portfolio is built with the ability to withstand these conditions. With a diverse array of products, the incorporation of Java, and the acquisition of other brands, EMC will be able to pose strong competition within its market in the foreseeable future.

The cash flow statement from 2009 to the present is very strong.  It has consistently been cash flow positive, and earnings are projected to continuegrowing in the future. A massive market cap of $54,066.9 million is attractive to the investor because it provides a sense of stability and safety based on size alone. In addition, EMC traded at a multiple (EV/EBITDA) of 2.01 in 2011; this low multiple shows that investors may be getting a value investing in EMC.

EMC announced at the end of October that an agreement was signed to acquire Silver Tail Systems, a cash flow positive, privately held company in the Dec-Q. While it is not expected to have an impact on EMC’s GAAP or non-GAAP EPS in 2012 as it is nearing its end, the impacts of this acquisition will be reflected in the near future. This acquisition is important to note as EMC has a record of intelligent acquisitions and making them work. Silver Tail Systems, in particular, is likely to enhance EMC’s security abilities beyond competitors—a top priority for large companies.

When analyzing EMC Corporation, it is crucial to take into account its 80% ownership of outstanding shares in VMware (NYSE:VMW), the clear market leader in the server virtualization market. While VMware faces competition from developing companies, they beat consensus EPS in 3Q12 at $0.70, and are in-line with consensus estimates for the fiscal year with a good chance of outperforming guidance expectations. While having such a large stake in VMW is a double-edged sword for EMC, the consistent performance by VMware poses little threat for EMC Corporation as it accounted for a significant portion of their Q3 revenue.However, the other side to the “double-edged sword” is that if VMW flat lines, EMC is unlikely to see much growth as EMC and VMW shares have traded for the past three years with a correlation of 0.73…

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