We have a Neutral rating on EMC Corp. (EMC) with a price target of $20. Based on forward earnings estimates, the stock is trading at 21.1X, 2010 EPS estimates.
 
Leader in Storage
 
EMC was the overall storage software market leader with a 22.7% market share in 2009, for eight consecutive years, according to IDC, followed by Symantec Corp. (SYMC) (17.9% market share), International Business Machines Corp. (IBM) (13.5%), NetApp Inc. (NTAP) (8%) and CA Technologies (CA) (4%).
 
EMC was also the premier vendor of external storage sales in 2009, followed by IBM and Hewlett-Packard Co. (HPQ). The information storage business is EMC’s largest segment (76.0% of fiscal 2009 revenues), which will benefit from the company’s market leadership position.
 
According to a recent IDC research, EMC occupied the top position with storage sales of $1.2 billion in the first quarter of 2010, improving 38.0% from the year-ago quarter while its market share rose from 21.0% to 24.6% in the first quarter of 2010.
 
As a technology leader in the storage category, EMC is well positioned to benefit from the long-term growth in the industry. We expect it to grow above the market in the next few years.
 
Recent Results
 
EMC’s first quarter 2010 earnings of 20 cents per share exceeded the Zacks Consensus Estimate of 18 cents per share. The improvement in results is mainly attributable to the continued focus on technology, increased execution efforts and operational efficiencies.
 
Revenues for the first quarter of 2010 were $3.89 billion, up 23.5% from $3.15 billion reported in the year-ago quarter. Revenues grew year over year for the second consecutive quarter, driven by a recovery in corporate IT spending, strategic investments and pent up demand. This was the second consecutive quarter of record revenue growth, according to management.
 
During the first quarter conference call, EMC did not provide quarterly guidance, but the company had raised its guidance for the full year 2010. Consolidated revenues are now expected to be $16.5 billion for 2010 versus previous estimate of $16 billion. Non-GAAP operating income is expected to be 20% to 21% of revenues for 2010 versus previous forecast of 20% in revenues.
 
Non-GAAP diluted earnings per share, excluding the impact of restructuring and acquisition-related charges, stock-based compensation expense and intangible asset amortization are projected to be $1.18 compared with the previous expectation of $1.12 per share.
 
Including stock-based compensation expense but excluding one-time charges, non-GAAP earnings per share is expected to be 94 cents. The Zacks Consensus Estimate calls for 95 cents per share in earnings for fiscal 2010.
 
Remain Neutral
 
EMC has reasserted its market leadership in the important high-end storage product category with the launch of V-MAX, its new Symmetrix line.
 
We believe that EMC is benefiting from increased revenue growth, improved storage demand, strategic alliances, strong earnings momentum, increased business execution, impressive free cash flow, favorable new product cycle and cloud computing initiatives as well as stringent cost reduction efforts.
 
EMC has the potential to benefit from restructuring activities, with financial metrics growing stronger and aiding the company to reach its long-term targeted return levels. We believe EMC can grow above the overall storage industry and is a value stock for long-term investors.
 
Although EMC’s results are well ahead of expectations, competition from IBM, NetApp and Hewlett-Packard is intensifying. Hence, increasing competition from NetApp in storage products could limit the stock’s relative appreciation in the near term.
 
We therefore maintain our long-term Neutral recommendation on EMC. Currently, the stock is rated a Zacks Rank #3, which implies a short-term Neutral rating on the stock.
Read the full analyst report on “EMC”
Read the full analyst report on “SYMC”
Read the full analyst report on “IBM”
Read the full analyst report on “NTAP”
Read the full analyst report on “CA”
Read the full analyst report on “HPQ”
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