Q. I’ve been following EMC Corp. for months. I’ve noticed that it is an actively traded stock, and the share price has gone up. What do you think of this stock?
A. The No. 1 provider of data-storage hardware, software and services is benefiting from strong industry spending on storage, which is expected to continue for the next several years.
Sales of software licenses have been robust, and the company’s large installed-customer base helps in this highly competitive field. Although Asia remains its strongest sales region, North America lately has made some significant gains.
Shares of EMC Corp. (EMC) are up 46 percent this year, following declines of 3 percent last year and 8 percent in 2005. The company is close to completing its planned $1 billion stock repurchase this year.
Second-quarter profit was up nearly 20 percent, and it was the fourth consecutive quarter that the company exceeded earnings estimates. Management expects the second half to be somewhat better than initially expected.
The consensus rating of EMC stock by Wall Street analysts is “buy,” according to Thomson Financial. That consists of six “strong buys,” 12 “buys” and nine “holds.”
Following the successful initial public offering of VMware Inc., EMC retains an 89 percent stake in that company. It purchased VMware in 2004 for $625 million and must retain a controlling stake for five years so EMC shareholders avoid a taxable gain on the acquisition.
VMware’s “virtual” software, enabling one piece of hardware to run multiple operating-system images at the same time, reduces processing power costs. EMC’s substantial stake in VMware adds appeal to EMC shares.
EMC also agreed to spend an undisclosed sum to buy privately held Tablus Inc., whose business is the prevention of data leaks from corporate networks. This is another hot area in the storage field.
There is always pricing pressure and the possibility of component shortages in the storage field. But EMC has a strong balance sheet, with about $6 billion in cash and $3.45 billion in convertible debt. There is plenty of money to spend on new products, acquisitions and stock buybacks.
Earnings are expected to increase 28 percent this year versus the 6 percent predicted for the data-storage-device industry. Next year’s projected 19 percent rise compares with 26 percent forecast for its peers. The five-year annualized return is expected to be 15 percent, which is in line with its industry.
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Andrew Leckey is a Tribune Media Services columnist. E-mail him at yourmoney@trib une.com.