Wednesday, 29 January 2014

VMWare and EMC: thoughts, charts and numbers

VMware is a complex but fascinating business who describe themselves as:

'the leader in virtualization and cloud infrastructure solutions that enable businesses to thrive in the Cloud Era'

Back in October, I profiled this company as a 15% per annum growth business and using the company measurement 'excluding pivotal and divestitures' they achieved the top range of their targets (although licence growth lagged revenue growth). 

Both aspects should grow slightly faster in 2014 as per the company's forward guidance. 


The only wiggle in the numbers seems to be that the company is guiding for a 2014 operating margin of 31%, down from a 2013 level of 34%. This is due to investments in the newly-acquired AirWatch (mobile app management and security solutions) which are not expected to be accretive until late 2015.  This helped the company come off the US$100 level achieved earlier this month to the current low US$90s. 

The company trades on a forward P/E of x26 which for a prospective 15% growth company seems full.  I note the US$85 which earlier in the last 52 week period acted as a resistance level but could now be a support. 

All of this is important as:

Today EMC owns 79.5% of VMware which is worth approximately US$31.5bn.  If I value this at US$85 this would be worth c. US$29bn. 

EMC's market cap is just over US$50bn. 

So the ex-VMW (at US$85) value of EMC is around US$21bn currently.  Is it worth it?  EMC is the global number one in storage servers ('Information Infrastructure' below), which grew solidly in FY13 at 5%.  The Q4 growth of 10% year-on-year was a good bounce back from the Federal Government shutdown influenced level of 1% in Q3. 

Even if I attribute all the central costs at EMC-led business to the Information Infrastructure business, this was a Euro2.4bn profit generator during the year.  To use Euro2.5bn as a prospective figure seems sensibly prudent.  

Currently the EMC ex VM Ware 'stub' is trading around x8 this year's operating profit for the Information Infrastructure business.  About right for a mid single digit growth business?

I note too the continuing positive capital allocation work.  US$2bn of buyback is equivalent to a 4% buyback.  Add on a 1.6% dividend yield and that's nearly 5.5% back to investors.  Not too bad. 


Looking at the recent share price chart, supplementing my current EMC position (bought in late October) at the US$24 and (if required) US$22 levels makes sense to me.



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