It's earnings time for data storage specialist EMC (NYSE:EMC), with a second-quarter report coming out tomorrow morning. The first quarter was a hit, but the stock has faltered in the past few weeks. What's going on in the kitchen?

What Fools say:
Here's how EMC's CAPS rating stacks up against some of its peers and competitors:

 

Market Cap (billions)

Trailing P/E Ratio

CAPS Rating

International Business Machines (NYSE:IBM)

$177.2

16.8

***

Hewlett-Packard (NYSE:HPQ)

$106.3

14.0

****

EMC

$25.9

16.7

*****

Sun Microsystems (NASDAQ:JAVA)

$7.4

12.5

***

Brocade Communications Systems (NASDAQ:BRCD)

$2.5

17.6

****

Data taken from Motley Fool CAPS and Yahoo Finance on July 22.

EMC sports five shiny CAPS stars, and that top-notch rating has stayed steady for months. I can't find a seriously bearish player commentary on this stock since the month of March, while over 70 bulls have chimed in over the same time span.

"I don't think there's ever been a better time to buy the master of storage," said CAPS all-star falcon2382 -- in April, on the other side of another 12% share price drop. "Recession or no recession, we are not in the beginning stages of a tech boom where companies bought storage because it offered them POTENTIAL growth. We are now in a situation where companies DEPEND on storage capacity to stay alive."

What management does:
EMC spun out virtual server segment VMware (NYSE:VMW) last August, but you won't see any dramatic changes in the parent company's operating trends around that pivotal event. Why not? Because EMC still owns 85% of all VMware stock (and 99% of the voting rights), and still treats the company as a division within EMC for reporting purposes.

That said, there are some good things going on here such as healthy sales growth, expanding gross margins, and lush, rich cash flows. Yummy!

Margins

12/2006

3/2007

6/2007

9/2007

12/2007

3/2008

Gross

53.0%

53.1%

53.5%

54.2%

54.5%

55.0%

Operating

12.6%

12.5%

12.8%

13.1%

13.4%

13.3%

Net

11.0%

10.9%

10.8%

12.1%

12.6%

11.8%

FCF/Revenue

12.8%

13.7%

15.0%

16.5%

18.3%

18.7%

Y-O-Y Growth

12/2006

3/2007

6/2007

9/2007

12/2007

3/2008

Revenue

15.4%

16.1%

18.9%

18.4%

18.6%

18.5%

Earnings

8.3%

11.0%

17.3%

54.9%

35.7%

28.3%

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

One Fool says:
In the past four quarters, the VMware subsidiary/not-so-joint-venture/puppet show stood for around 11% of EMC's revenue and 17% of gross profits. The information storage division remains the workhorse in this stable and produces three-quarters of the EMC's operating income, but it is hardly an exciting growth play.

EMC has made a few smart acquisitions like VMware and RSA Security in the past couple of years to augment its growth opportunities. The latest addition to the team is Lilliputian storage specialist Iomega, a $213 million tidbit that gives EMC some exposure to consumer markets.

Data security (RSA), virtual machine software (VMware), and end-user storage gadgets (Iomega) are all natural extensions of EMC's core competency in data storage and management. The company is adding new opportunities the same way a sandwich builder might put extra onions on a cheesesteak sub, without spreading itself thin over unfamiliar breads or slapping strawberries and barbecue sauce on that Philly.

So for the long term, I'm comfortable with EMC's position in the industry. The stock happens to be on sale at the moment, after VMware got a new CEO to the market's general consternation. I think that those fears are overblown, and the proof will be in the pudding tonight. These two stocks will rise again.

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Fool contributor Anders Bylund holds no position in any of the companies discussed here but he is a certified Solaris and AIX administrator and has a working history with EMC products. You can check out Anders' holdings if you like, and Foolish disclosure is the Punxsutawney Phil of financial forecasting.