The Best Reasons to Buy EMC Now

More than anything else, managers determine returns. They set strategy, hire key team members, oversee operations, and cash paychecks. Every move they make either enhances or destroys shareholder capital.

It pays to know who these men and women are, how they're paid, whether they, too, are owners, and how they perform versus competitors in certain key metrics. In this regular column, I'll examine all that and more with the goal of enhancing our understanding of some of the top stocks in Fooldom.

Next up: EMC (NYSE: EMC  ) . Is the executive team of this data storage superstar doing all it can to earn you outsized returns?

Foolish facts

Metric

EMC

CAPS stars (out of 5) *****
Total ratings 3,426
Percent bulls 96.4%
Percent bears 3.6%
Bullish pitches 527 out of 553
Highest rated peers Synaptics, China Digital TV, Western Digital

Data current as of January 28.

Fools have good reason to like EMC. The company deals in large numbers. At a recent event, Chief Financial Officer David Goulden told analysts to expect revenue to grow 13.3% annually over the next four years to $28 billion, Dow Jones Newswires reports.

He also said per-share earnings should grow faster than revenue, which means analysts' projections for 14% long-term growth could prove conservative. If he's right and EMC starts a streak of blowing away analyst estimates, the 58% run the stock has enjoyed over the past year could begin to look like chump change.

Even so, the possibility of outsized earnings growth isn't the main reason why bulls like the stock. EMC's big stake in VMware (NYSE: VMW  ) is what really gets them snorting. My Foolish colleague and editor Eric Bleeker put it best in nominating EMC as his pick for the best stock of 2011.

"When you consider that VMware is now worth more than $37 billion, that means EMC's stake in VMware comes out to nearly $30 billion. Since EMC itself only has a market [capitalization] of $46 billion, that means its business is only worth about $16 billion after netting out its VMware holdings," he wrote at the time.

Management overview

Executive

Years

Cash Compensation

Shares Owned

Joe Tucci, Chairman, CEO, and President 11 $1,940,728 1,606,461
David Goulden, Chief Financial Officer 9 $1,095,759 537,947
Howard Elias, President of EMC Info. Infrastructure 8 $1,072,810 544,382

Source: Capital IQ, a division of Standard & Poor's; SEC filings. (Data current as of Feb. 13.)

EMC has since added $10 billion in market value. Can the rally continue? On the basis of valuation, it certainly seems like it. Taking out VMware-related revenue, EMC's fast-growing core business is valued at less than 2 times the $14.2 billion in revenue it generated last year, and even less than that if you account for the company's $1.9 billion in excess cash and investments net of debt.

The guys at the helm also have a long-term history of creating value at the company. EMC had near-zero returns on capital in CEO Joe Tucci's first year as CEO (2001). Last year, the company earned an 8.5% return on its capital.

Management analysis versus competitors

Company

Insider Ownership

Gross Margin

ROC*

ROE**

EMC 0.35% 59% 8.5% 11.5%
Hitachi (NYSE: HIT  ) 0.04% 25.6% 6.2% 17.2%
NetApp (Nasdaq: NTAP  ) 1.08% 64.4% 11.1% 21.1%
Quantum (NYSE: QTM  ) 1.69% 41.9% 7.5% NM***

Source: Capital IQ, a division of Standard & Poor's. (Data current as of Feb. 13.)
* Return on capital. ** Return on equity. *** Not measurable.

Interestingly, this table argues more for rival NetApp than it does EMC. Yet both companies sport great numbers. The two that matter most are 18 and 29. EMC trades for 18 times estimated 2011 earnings while NetApp trades for 29 times projections for the current fiscal year, even though NetApp is expected to grow only modestly faster than its larger peer.

There's no logic to the disparity, which is why I believe EMC is the better buy. I added the stock to my CAPS portfolio this morning. Do you agree? Disagree? Let us know what you think about EMC using the comments box below. You can also recommend other stocks for me to evaluate by sending me an email, or replying to me on Twitter.

Interested in more info on the stocks mentioned in this story? Add EMC, Hitachi Ltd., NetApp or Quantum to your watchlist.

China Digital TV and VMware are Motley Fool Rule Breakers recommendations. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the Rule Breakers stock-picking team. He didn't own shares in any of the companies mentioned in this article at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool owns shares of EMC and Western Digital and is also on Twitter as @TheMotleyFool and its disclosure policy is managing just fine, thanks.


Read/Post Comments (2) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 15, 2011, at 7:57 AM, crazydeer wrote:

    I like their cloud computing focus and think that long term, this stock could offer very high long term gains. I also like their price compared to other stocks. Many think them undervalued. Just makes me want to hold.

  • Report this Comment On February 15, 2011, at 9:39 AM, 4111david wrote:

    Well written article

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