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<DAILY DOUBLE>
Thursday, December 24, 1998

EMC Corp.
(NYSE: EMC)
Phone: 508-435-1000
Website: http://www.emc.com
Price (12/23/98): $82 5/8


HOW DID IT DOUBLE?

When one thinks of technology stocks with stellar performance figures over the past several years that have made shareholders rather wealthy, certain names are sure to come to mind -- Cisco Systems (Nasdaq: CSCO), Microsoft (Nasdaq: MSFT), and America Online (NYSE: AOL) might make the short-list. Its story is not as well known, but EMC Corp. (NYSE: EMC) should be added to that elite list of companies. It's amazing to think the stock started the decade at a split-adjusted $0.25 per share.

First, let's look at how the company's top and bottom lines have exploded over the past few years:

($ millions)

1994

1995

1996

1997

1998(TTM)

Revenue

1377.5

1921.3

2273.7

2937.9

3656.3

Profits

250.7

326.8

386.2

538.5

703.1

EPS

$0.55

$0.67

$0.79

$1.04

$1.33

Such smooth and robust growth is normally received quite well by Wall Street, and EMC is no exception. After spending much of 1994 and 1995 in a tight trading range around $10 per share (adjusted for a late-1997 two-for-one split), the stock didn't really start to take off until late 1996. Since then, EMC's stock has given shareholders plenty to cheer about. Not only has the stock roughly quadrupled over the past two years, it has nearly doubled in the past three months. There are few better examples of how an expanding market multiple mixed with growing financials can sling a stock skyward.

BUSINESS DESCRIPTION

EMC makes "industrial strength" storage systems used by large computer systems and networks. EMC is the largest maker of mainframe data storage and retrieval hardware and software. Operating under the name Symmetrix, the company's primary products are RAIDs (redundant array of independent disks), used for data storage and retrieval by larger mainframe computers and network file servers. Other EMC products allow data to be shared across networks of computers with different operating systems.

EMC is a member of the S&P 500 Index.

FINANCIAL FACTS

Income Statement
12-month sales: $3,656.3 million
12-month income: $703.1 million
12-month EPS: $1.33
Profit Margin: 19.2%
Market Cap: $44,642.3 million

Balance Sheet
Cash: $903.7 million
Current Assets: $2817.3 million
Current Liabilities: $630.7 million
Long-term Debt: $540.8 million

Ratios
Price-to-earnings: 62.1
Price-to-sales: 12.2

HOW COULD YOU HAVE FOUND THIS DOUBLE?

EMC didn't always command the respect it does these days. Between 1990 and 1996, the stock could have been bought in the general range of 9 to 30 times trailing profits. In 1996, the stock was going for as little as 9 times trailing profits, even though earnings were in the process of growing like kudzu. Needless to say, the P/E multiple the market is now assigning the stock is a bit higher. Sometimes the good old method of buying stocks with an earnings growth rate higher than the trailing P/E ratio works wonders.

Running a screen for increasing margins also would have shown EMC as a strong buy candidate. Net margins, which are already quite fat, have gone from 17.0% in 1996 to 18.3% in 1997. In the past 12 months, net margins are up to 19.2%.

WHERE TO FROM HERE?

While the data storage market is subject to some rather fast product cycles and can see the prices of drives drop like rocks in a relatively short amount of time, the enterprise storage market (which EMC currently dominates) as a whole is expected to triple in size over the next three years. Drives may be getting perpetually cheaper, but the hunger for larger and larger amounts of digital storage shows no sign of satiation anytime soon, as huge sound and video files start to become more commonplace.

In any case, it is difficult to maintain 40-50% annual growth for long before size starts to become a major hindrance to future expansion. Slower growth is what investors in EMC should expect. The company has managed to grow its earnings over the past five years at a 66% clip, but the long-term estimated growth rate is only 27%. It's still an impressive number, just not as explosive as what's shown on the past books.

EMC's performance over the past several years has been akin to that of the Microsofts and Ciscos of the world, and investors in EMC find themselves pondering the same questions asked by shareholders of the other bellwether firms. While the historical performance has been superb and the future fundamental business is bright, the current price tag on the company -- 60 times trailing earnings and over 40 times estimated forward profits -- is anything but cheap. EMC is a quality company, but how steep a price does one pay for quality? It's a question best answered by each individual investor.

-Paul Larson (TMFParlay@aol.com)


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