EMC Corp. (EMC) has the potential to benefit from restructuring activities, with financial metrics growing stronger and helping the company to reach its long-term targeted return levels. Therefore, we upgrade the stock to Neutral from our previous Underperform recommendation indicating that we expect it to trade at a premium to the peer group. 

We remain positive on EMC’s long-term growth and believe the shares are currently undervalued. We raise our six-month price target to $20.00, 22.5X 2010 EPS. 

EMC’s fourth-quarter results as announced on January 26, 2010 exceeded the Zacks Consensus Estimates and its own expectations. Revenues were a record for the quarter, growing after four consecutive quarters of year-over-year declines, driven by cost-cutting and a recovery in corporate IT spending.
We believe that EMC is benefiting from strategic alliances, strong earnings momentum, increased business execution, impressive free cash flow, a favorable new product cycle and cloud computing initiatives as well as stringent cost control efforts.
Further, EMC is the overall storage software market leader, having maintained the position for eight consecutive years and obtained a 22.7% market share in 2009, according to IDC. EMC is followed by Symantec Corp. (SYMC) (17.9% market share), International Business Machines Corp. (IBM) (13.5%), NetApp, Inc. (NTAP) (8%) and CA, Inc. (CA) (4%). EMC was also the number one vendor of external storage sales for 2009, followed by IBM and then, Hewlett-Packard Company (HPQ).
The information storage business is EMC’s largest segment (76.0% of fiscal 2009 revenue). As a technology leader in the storage category, EMC is well positioned to benefit from the long term growth prospects in the industry. 

The company continues to boast a very strong balance sheet, with net cash (cash less debt) per share of $1.71 at the end of December 2009 versus $1.51 at the end of September 2009. For the fourth quarter, EMC generated record operating cash flow of $1.0 billion and free cash flow of $793 million. 

In 2009, EMC has generated operating cash flow of $3.30 billion. The company also had deferred revenue of $2.26 billion as of December 2009 versus $1.26 billion as of September 2009. In 2009, EMC generated solid free cash flow of $2.62 billion, which is higher than the non-GAAP net income. We believe the company is on track to record impressive free cash flow in 2010.
Earnings Outlook 

In the fourth quarter, including stock-based compensation expenses but excluding amortization of intangibles, restructuring and acquisition related charges, and other special charges, Non-GAAP earnings per share were 25 cents per share, compared to 24 cents per share in the year-ago period. Earnings beat the Zacks Consensus Estimate of 24 cents per share and the company’s own guidance. 

The company provided a robust outlook for 2010 with corporate IT spending and demand are showing signs of stabilization. Consolidated revenue is expected to be $16 billion for 2010. Management expects 2010 non-GAAP R&D expense to increase 20% over 2009 levels. Cost of transition to a more efficient operating structure is expected to be $50 million. Non-GAAP operating income is expected to be 20% of revenues for 2010. Total non-operating expense is expected to be $90 million in 2010.
Although EMC’s results are well ahead of expectations, competition from IBM, NetApp and Hewlett-Packard is intensifying, resulting in weaker pricing and feeble demand. Management expects non-GAAP diluted earnings per share of $1.12, which is much above the Zacks Consensus Estimate of 89 cents. There were no analyst estimate revisions for the current year and we expect the company to report in line with the Zacks Consensus.
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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