Data storage specialist and former high-tech darling EMC (NYSE:EMC) reports earnings for Q4 and FY 2005 Tuesday morning. Analysts are feeling optimistic -- should you?

Wall Street Wisdom:

  • General consensus. 28 analysts follow EMC, and nearly every one of them rates the company a "buy" -- in fact, just three of the bunch voice "hold" sentiments.
  • Revenues. Despite the recent weakness among tech powerhouses such as Intel (NASDAQ:INTC) and GE (NYSE:GE), analysts continue to expect EMC to produce 14% sales growth and report $2.7 billion in revenues tomorrow.
  • Earnings. What's more, they're looking for even better earnings growth -- 31%, to $0.17 per share. Beware these lofty expectations.

Margin watch:
What's that, you say? EMC's margins are out of this world, and growing? True enough. Over the past 18 months, this is what we've seen:

Marg.

6/04

9/04

12/04

3/05

6/05

9/05

Gross

49%

50.5%

51.2%

51.8%

52.5%

53.1%

Op.

11.1%

12.4%

13.4%

14.3%

15%

15.6%

Net

9.9%

10%

10.6%

11.6%

12.3%

14%
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ending in the named months.

Inventory check:
I won't argue that the above numbers aren't impressive. But before you get too excited, examine what's been going on with the company's inventories and accounts receivable, relative to sales growth.

Quarterly Change*

6/05

9/05

Sales

+19%

+17%

A/R

+21%

+23%

Inventories

+28%

+38%
*Year over year.

When either A/R or inventory growth begins to outpace sales growth, be wary. When both A/R and inventories start to run away from the sales numbers, be worried.

Competitors:
EMC has plenty of competition in this space, which it once owned. Watch out for up-and-comer Hitachi (NYSE:HIT) and reviving powers Hewlett-Packard (NYSE:HPQ) and IBM (NYSE:IBM).

Fool contributor Rich Smith does not own shares of any company named above.