3 Reasons to Buy EMC Today

Better earnings growth, better cash flow growth, and better value -- what more do you want?

Mar 5, 2014 at 2:00PM

It's hard to believe the difference between some companies today versus 10 or 15 years ago. More than a decade ago, EMC (NYSE:EMC) was a technology darling and shares were worth nearly $100 apiece. Microsoft (NASDAQ:MSFT) was worth almost $60 per share, and Hewlett-Packard Company (NYSE:HPQ) could be purchased for $66 per share. With none of these stocks trading at more than $40 today, investors who bought at the top have lost almost a decade-and-a-half. However, EMC seems to be in the best position for future growth, and investors have three reasons to buy the stock today.

Big trends that benefit EMC
EMC acquired Pivotal Labs to give itself a stronger presence in the Big Data industry. Between EMC, Pivotal, and its ownership of VMWare, the company can offer the software and hardware solutions that businesses need to make sense of all of the data being created.

EMC also identifies the trends of mobile, social, and cloud as three additional forces driving the need for more sophisticated storage, management, and software. It's true that Microsoft's SQL server, and the company's cloud services, witnessed significant growth in the most recent quarter, but Microsoft can't offer businesses integrated software and hardware of its own.

Hewlett-Packard offers both software and hardware solutions, but still gets over 50% of its revenue from personal systems and printing. Between the company's enterprise group, enterprise services, and software group, the best performer reported a 1% increase in revenue.

By contrast, EMC reported an 11% revenue growth rate, and the company grew its cash flow faster than its peers. Faster operating cash flow growth should mean better dividend increases and share repurchases, which is the first reason to buy EMC.

EMC increased its core operating cash flow (net income + depreciation) by nearly 9% in the last year. By comparison, HP and Microsoft reported operating cash flow growth of 6%, and just over 5% in the last three months. On the surface, HP and Microsoft's results show a shorter-term growth rate that appears to be better, but neither company has generated consistent earnings and cash flow growth like EMC.

As proof that EMC may be better positioned, consider that the company's core free cash flow payout ratio is projected at less than 14%, while HP pays 18% and Microsoft pays 38%. EMC's superior growth rate, combined with its lower payout ratio, suggests that investors may expect more in the way of dividend increases and share repurchases.

Proof
The second reason to buy EMC is the company's commitment to share repurchases. Based on the company's share repurchase activity in the last year, the company outperformed peers by a wide margin. EMC repurchased 4% of its diluted shares in the last year. By contrast, HP's diluted share count stayed flat, and Microsoft's shares declined by just over 0.5%.

EMC's share repurchase target for 2014 suggests this outperformance may continue. The company plans on making approximately $2 billion in share repurchases this year. At current prices, this would retire about 4% of the company's shares.

Just better
Not only is EMC growing faster and buying back shares more quickly, but based on projected earnings and EPS growth, the stock is a better value as well. The combination of the company's yield and expected growth rate makes shares look very tempting, and this is the third reason investors should buy EMC.

HP has the lowest projected P/E ratio for 2014 at just 8. However, the company's lackluster expected EPS growth of 4%, and yield of under 2%, gives the company a PEGY of 1.4. Microsoft's transition to hardware sales is hurting margins (gross margins dropped from over 70% to 66% in the current quarter), and analysts expect EPS growth of under 8% in the next few years. With a forward P/E of 14 and a yield of less than 3%, Microsoft's PEGY is 1.4.

EMC's yield of 1.5%, and expected EPS growth of just under 12%, seem to represent a more compelling value than those of its peers. Considering that shares trade for a forward P/E of under 14, a PEGY of 1 indicates a 40% relative discount to HP or Microsoft.

Final thoughts
While EMC stock may not reach $100 per share any time in the near future, shares appear attractive at these levels. Better cash flow growth, significant share repurchases, and a better relative valuation profile suggest investors should add EMC to their watchlists today.

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Chad Henage owns shares of Microsoft. The Motley Fool owns shares of EMC and Microsoft. Try any of our Foolish newsletter services free for 30 days. 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 has a disclosure policy.

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