Tic-tac-toe, investors want to know: After trumping analyst earnings estimates in each of the past two quarters, can EMC
What analysts say:
- Buy, sell, or waffle? The voting on this electronic archivist goes 19-to-5, buy versus hold.
- Revenues. On average, the analysts are looking for 15.5% sales growth to $2.95 billion.
- Earnings. Profits are predicted to decline 19%, to $0.13 per share.
What management says:
The big news at EMC this quarter was the apparent reversal of its strategy of growing by acquisition. In early February, the company announced the IPO of a stake in a firm it had bought outright three years ago: VMWare. According to management, the idea of selling a 10% stake in the subsidiary is simply to "Unlock [the] Market Value of VMware for EMC Shareholders" -- no more, no less. Moreover, management expressly dismissed any intention of "spinning out or otherwise divesting" the remaining 90% of VMWare, which it plans to retain.
In the not entirely unbiased words of CEO Joe Tucci, "VMware is one of the fastest-growing businesses in the history of the software industry ... growing revenues 83%" last year and accelerating as the year progressed, with Q4 sales in particular rising 101% year over year. With EMC's shares lagging the market over the past 52 weeks, the thinking seems to be that if Mr. Market won't pay up for the whole package, perhaps management can at least get a premium for the company's sexiest segment.
What management does:
For the record, it's an argument I buy. Because when you look at it, EMC proper really hasn't done anything deserving of an underperforming stock price. Sales were up more than 15% last year. Profit margins were basically unchanged from a year ago, down just a few basis points -- no big deal.
|
9/05 |
12/05 |
3/06 |
6/06 |
9/06 |
12/06 |
|
|---|---|---|---|---|---|---|
|
Gross |
53.1% |
53.7% |
53.9% |
53.8% |
53.6% |
53.6% |
|
Operating |
15.6% |
16.4% |
16.7% |
16.4% |
16.5% |
16.2% |
|
Net |
14.0% |
11.7% |
11.4% |
11.0% |
9.2% |
11.0% |
One Fool says:
That said, just because I buy Tucci's explanation, that doesn't necessarily mean you should. Consider: In his earnings write-up last quarter, my Foolish colleague Anders Bylund discussed EMC's plans to take some time this year to sort out, improve, and rationalize the 22 businesses that it's brought into the fold over the past three years. Reasoning that inorganic sales growth is great and all, but also that the company needs to get itself in good order if it's to continue battling rivals the likes of IBM
Viewed in the context of a company engaged in figuring out how to best use the many assets it's acquired over the past three years, the sudden move to take the market's temperature on one of the earliest acquisitions of the period looks, shall we say, interesting. Again, I'm not saying EMC is saying one thing while planning another. It just wouldn't surprise me too awfully much if a few quarters, or years, after a successful IPO of VMware, we learn that EMC is willing to sell the whole shebang for a nice mark-up.
What did we expect out of EMC last quarter, and what did it produce? Find out in:
- Foolish Forecast: Earnings Taking a Hit at EMC
- EMC's Spending Spree: Fool by Numbers
- EMC Stops, Smells Roses
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Fool contributor Rich Smith does not own shares of any company named above. The Fool has a disclosure policy.
