EMC: Savvy Shopper

I know several people who won't purchase anything that isn't on sale. They value a dollar so much that they won't spend it till they feel they're actually getting more than their money's worth.

Too bad these folks aren't stock pickers. Buying at a steep discount is one of the premises of value investing. Some smart managers apply this principle in acquiring resources for growing their businesses. Unsurprisingly, finding the ones who do this best can be a profitable stock-picking strategy. (Indeed, it happens to be key to Tom Gardner's approach for Motley Fool Hidden Gems.)

Ladies and gentlemen, please welcome EMC (NYSE: EMC  ) to my short list of firms that invest smartly.

EMC's efforts to buy a turnaround paid off spectacularly this morning. For its 2004 first quarter, the data storage supplier grew revenue by 35% to $1.87 billion, and net income by 300% to $140 million, over the same period a year ago.

The genesis of the gains is three acquisitions EMC made last year. Although initial skepticism surrounded the strategy -- and its attendant $3.6 billion price tag -- investors have warmed to the deals for Legato Systems, Documentum, and VMWare. EMC's shares are up 17% since the announcement of its first acquisition for Legato made on July 8, 2003. The total return of the S&P 500 is 13% over the same period.

Any remaining skepticism should be swept away with this morning's results. According to EMC executives, the acquired companies combined to contribute 14.7% of the firm's revenue growth during the quarter, while core operations grew 20.5%.

But EMC isn't without its problems. A Forbes article cites a study from Merrill Lynch (NYSE: MER  ) that says companies peddling storage would have seen their earnings per share decline by a median of 92% over the past three years had stock options been expensed. Indeed, today's report concedes that EMC would have lost $0.04 of its $0.06 per share of net income this quarter with options expensing.

EMC also faces considerable competition from the likes of Network Appliance (Nasdaq: NTAP  ) and Veritas Software (Nasdaq: VRTSE  ) in its core storage market to IBM (NYSE: IBM  ) and Hewlett-Packard (NYSE: HPQ  ) in big-ticket management software.

Still, EMC isn't without resources, and its management strikes me as talented and aggressive. But perhaps most importantly, I've found throughout my life that it's nearly always smart to stick with a savvy shopper. There have been few more savvy than EMC in the past year.

Want to find out more about how Tom Gardner and our Foolish band of analysts are walloping the market? Don't be shy; check outMotley Fool Hidden Gemswith a free 30-day trial.

Fool contributor Tim Beyers is a savvy window shopper. He owns no stake in any of the companies in this story, and you can view his Fool profile here.

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