Man, I hate sounding like a broken record. But, man, EMC
A favorable currency exchange climate boosted EMC's revenue by 3.1%, but that's a pittance when you look at how the core business did overall. Sales in every part of the world grew by double digits, including a 44% jump in Europe. Vive la storage, indeed.
Many other indicators show a business firing on all cylinders. Gross margin, for example, improved to 51.4% for the quarter and 50.7% year to date. That's 7% better than at the same point last year. Finally, get this: Structural free cash flow grew 86% year over year, from $399 million to $742 million.
The only question remaining is whether EMC can continue to do as well as it has done. Management seems to think so. Fourth-quarter estimates call for revenue between $2.23 billion and $2.27 billion, with per-share earnings coming in at $0.11 to $0.12. At that rate, structural free cash flow should easily eclipse $1 billion for the year.
I admit it: I still love this business. In fact, I love it even more with each successive quarter. Yet EMC's stock options policy continues to hurt its results. Indeed, had options been expensed -- as they will be beginning next summer -- EMC's reported net income would have been 40% lower. Ouch.
Fortunately, there have been some improvements in EMC's options policy. Though dilution remains high at roughly 9% -- well above the 3% to 5% we recommend for growing firms -- overall options grants are down, and more than 50% of EMC's outstanding options are out of the money. (CEO Joe Tucci has gone on record saying management won't reprice them.) Plus, 20% of EMC's options issued last year were in relation to acquisitions that have helped fuel the firm's remarkable turnaround.
Still, in an interview this morning, EMC Chief Financial Officer Bill Teuber noted that the company would continue buying back shares to offset dilution. Indeed, the firm has already spent better than $400 million to retire 37 million stubs this year. Sorry, Bill, but I think that stinks. Why? Because EMC's stock isn't cheap. If anything, EMC appears fairly valued trading for 23 times expected cash flow to enterprise value.
But should this really keep you or me from investing? After all, as Fool co-founder and Motley Fool Rule Breakers chief analyst David Gardner put it to me yesterday, there are plenty of market-trouncing stocks that dilute like crazy, such as Motley Fool Stock Advisor picks eBay
For related Foolishness:
- Bah! Who cares about EMC? VERITAS
(NASDAQ:VRTS)is trading at a discount, and Network Appliance (NASDAQ:NTAP)may be the one to beat for smaller storage deployments.
- Still, EMC's most recent quarterly performance was enviable.
- And the firm has, so far, proven to be a savvy shopper.
David Gardner has taken the market-beating approach first used in the Motley Fool's real-money Rule Breaker Portfolio to average Janes and Joes in his Motley Fool Rule Breakers newsletter. You can get in on the action by taking a free, 30-day trial.