EMC Revs Earnings Engine

The ugly truth about investing, rule No. 5: Stock prices rarely, if ever, perfectly reflect the fair value of the underlying company.

Yeah, OK, I made that up. But am I wrong? I don't think so. And I've got good company in my comfy perch. Legendary investor Benjamin Graham described the stock market as a voting machine in the short term and a weighing machine in the long term. His point was that stocks could be undervalued, or overvalued, for years. But, eventually, equilibrium comes to all. Maybe that's what is happening with EMC (NYSE: EMC  ) this morning.

The information storage hardware and software maker reported excellent results for the first quarter. Sales were up 20% year over year. Net income was up 93% over the same period. Owner earnings appear on track to exceed $1 billion yet again. The news just keeps getting better. And investors are -- finally -- taking notice. EMC's shares were up nearly 13% as of this writing.

The enthusiasm may also be attributed to management's sunny outlook. EMC expects to keep growing by more than twice the rate of its industry -- at least 15% -- during 2005. Gross margins should also continue to expand, while operating margins remain stable at today's levels. Do the math, and you come to realize that investors may still be underselling EMC's potential.

Indeed, if management is correct in its projections, EMC should book between $9.4 and $9.6 billion in revenue this year. Provided guidance for gross margins, operating expenses, and taxes lead to a projected net income of $1.2 to $1.25 billion over the same period. That would be more than 37% higher than 2004's total.

Impressive, right? Sure, but it gets even better when you put that growth into context. EMC has roughly $3.02 per share on the books in net cash and investments. That means ongoing operations are selling at a market price of $9.87 per stub as I write. Divide that by management's projected $0.51 in earnings per share for 2005, and you'll come up with a forward P/E ratio of 19. That's nearly half this year's anticipated growth rate, and slightly below the Street's five-year estimate of 20% growth.

How fitting: A data storage company that appears to have plenty of room to grow. No wonder investors are piling onto the bandwagon.

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Fool contributor Tim Beyers wishes his house had more storage. What do you think of EMC's valuation? Share your thoughts with other Fools at the Foolish Collective discussion board. Tim didn't own shares in any of the companies mentioned in this story at the time of publication. You can find out what's in his portfolio by checking Tim's Fool profile, which is here. The Motley Fool has a disclosure policy.


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