It's Friday, so of course the markets are down. But one stock, as of this writing, at least is seeing some green: EMC (NYSE:EMC), which is today reclaiming its post-earnings bump. But did EMC deserve the bump in the first place? That's what we aim to find out.

As you no doubt recall, EMC exceeded expectations when it reported Q3 earnings on Wednesday, if just barely:

  • Sales came in at $3.7 billion, or roughly the 13% growth that Wall Street was looking for.
  • Meanwhile, earnings were buoyed by a performance that fellow Fool Anders Bylund calls "sterling" at subsidiary VMware (NYSE:VMW). Earning $0.20 per share, EMC beat estimates and extended a winning streak that it's maintained from time immemorial.

And yet, the same concerns I voiced in my pre-earnings Foolish Forecast hold true today. EMC is still expanding its gross margin, but it's also growing its operating costs too fast to hold on to those margin gains. Worse, it's the wrong kind of operating costs that are growing.

The margin story
Q3 brought a modest increase of 20 basis points in gross margins at EMC -- quickly wiped out by a rise in selling, general, and administrative expenses from 29.8% of sales to 31.6%. Sizeable cuts to R&D (as a percentage of revenue) weren't sufficient to save operating margins from a tumble of 110 basis points. So far this year, operating margins are averaging only 11.4%, which, while still sufficient to eclipse Hewlett-Packard's (NYSE:HPQ) margin, seems destined to keep EMC lower than rivals like IBM (NYSE:IBM), VASCO Data Security (NASDAQ:VDSI), and Symantec (NASDAQ:SYMC).

And yet ...
So if EMC isn't investing as much as it probably should in research, if it's spending too much on overhead, yet not generating enough sales growth to justify it -- why, then, do I continue to like the stock?

Simply put: EMC is so darn cheap that its stock price incorporates this bad news and more. With more than $2.2 billion in free cash flow generated over the past 12 months, EMC sells for a little more than nine times free cash flow today.

Foolish takeaway
That's a bargain for a company that, as it never hesitates to remind us, "delivered its 21st consecutive quarter of double-digit revenue growth and solid double-digit profit growth." More importantly, it's a bargain for a company expected to keep on growing at better than 11% per year for the next half-decade.

What did we expect out of EMC last quarter, and what did we get? Find out in:

Fool contributor Rich Smith owns shares of VASCO Data Security. The Motley Fool has a disclosure policy.

Symantec is a Motley Fool Inside Value selection. VMware is a Motley Fool Rule Breakers pick. VASCO Data Security International is a Motley Fool Stock Advisor recommendation.