We have downgraded EMC Corp. (EMC) to Underperform from our previous Neutral rating, due to underlying near-term risks. The increasing downside risk to growth and low profit visibility in the near-term is expected to be the negative catalyst for the upcoming earnings. We lower our price target to $16.00, indicating that the stock will Underperform the market.
While EMC has the potential to benefit from restructuring activities, the company is cautious about reaching its goal in the near-term, given the unfavorable pricing environment and weak demand for its products. Further, we favor EMC’s closest peers, NetApp, Inc. (NTAP) and Hewlett-Packard Company (HPQ) as they have the ability to demonstrate a much higher growth rate and estimates for good earnings growth in 2010. We believe the increasing competition from NetApp and Hewlett-Packard is eating into its profits.
Although EMC’s recent earnings were well ahead of Zacks Consensus expectations, they were down from the year-ago period. We see limited upside in the near term and expect 2010 to be back-end loaded.
However, longer-term, the company will benefit from increased business execution, impressive free cash flow, favorable new product cycle, stringent cost control and the recent acquisition of Data Domain.
EMC is scheduled to release its fourth-quarter of 2009 earnings on January 26, 2010. In November 2009, EMC reaffirmed its previously issued 2009 non-GAAP earnings per share guidance of 30 cents for the fourth quarter of 2009 and 87 cents for the full-year 2009. However, the company lowered its GAAP earnings per share from 21 cents to 16 cents per share for the fourth quarter of 2009 and from 55 cents to 50 cents for full-year 2009. This revision is partially due to a higher GAAP tax rate, which the company now expects to increase to 21% from the previous expectation of 13% for 2009. Further, EMC will incur a reorganization charge of approximately $100 million in the fourth quarter of 2009.
EMC’s Board of Directors approved a plan to reorganize its international operations by transferring certain assets of its RSA and Data Domain entities and legacy foreign corporations owned directly by EMC into a single EMC international holding company. In connection with the reorganization, EMC’s international holding company will issue to EMC Corporation approximately $4 billion of consideration consisting of stock and cash. EMC expects the new structure of its international subsidiaries to be completed in 2010.
The consolidated revenue expectation was unchanged and is expected to be $4.00 billion for the fourth quarter of 2009 and $13.9 billion for fiscal 2009. Savings from cost reduction actions are expected to reduce the company’s 2008 cost base by $500 million in 2010.
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