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Is EMC the Ultimate Value Play in Storage?

In this video, Fool analyst Eric Bleeker describes why he believes EMC (NYSE: EMC  ) could be the best value for investors interested in the growing storage field. EMC and NetApp (Nasdaq: NTAP  ) are the two largest pure plays in the field, but as with many other growth industries, high growth leads to expensive multiples.

Looking at the more niche players in the industry, companies like Compellent (NYSE: CML  ) , Isilon (Nasdaq: ISLN  ) , and CommVault (Nasdaq: CVLT  ) all trade at trailing P/Es above 65 and forward multiples above 30. After the fierce bidding war between Hewlett-Packard (NYSE: HPQ  ) and Dell over high-end storage play 3Par, stocks across the industry rose sharply as the investors placed bets that other small players would be swooped up by the top dogs in this rapidly consolidating industry.

On the surface, EMC looks expensive as well, trading at 28 times its trailing earnings. However, EMC holds a valuable asset in its 80% ownership stake in virtualization expert VMware (NYSE: VMW  ) . After stripping out the value of EMC's VMware holdings, the effects of consolidating VMware into its financial statements, and dilutive stock-based compensation, EMC trades for less than 10 times its trailing free cash flow. For comparison, NetApp trades for around 24 times its trailing free cash flow.

Granted, investors could see VMware's price as overvalued as well, and divesting that stake to realize the full value of VMware doesn't seem likely, but the exercise does show that EMC is trading at a steep discount to its peers. If you're looking into storage companies, Bleeker says to check out EMC first. This deal on an industry leader might not last long.

Eric Bleeker owns shares of no companies listed above. VMware is a Motley Fool Rule Breakers pick. 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.

Read/Post Comments (2) | Recommend This Article (12)

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 November 12, 2010, at 1:57 PM, FW2981 wrote:

    EMC has done nothing as a stock for the last 10 years. Back in September 2000 it traded at $99.25. So if you bought this great value play back then and held on you would have lost almost 80%. Rumours are the only thing that will kick start this deadbeat, last month it was rumoured that Oracle would buy them, today its Ciscos turn at the same rumour. Please, please buy EMC to help all those who bought and held on for 10 years.

  • Report this Comment On November 12, 2010, at 6:10 PM, PeyDaFool wrote:


    What does the past ten years matter? JNJ hasn't been a great earner either, but it's poised for some serious growth. A declining share price couple with positive-moving financials screams "buy." Looking at the past ten years has no bearing on a smart investor's decision to own a company. In fact, a smart investor profits off your attitude of "the stock hasn't gone anywhere, let's sell."

    Don't get me wrong, I'm not advocating picking up shares of EMC, but your line of reasoning is not sufficient for recommending a "hold" or "sell" opinion of EMC.

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