Wednesday, 22 July 2015

EMC pulled back numbers, share up = good value in my view

I called my last posting on EMC 'start paying attention if you want to make money on the shares' (link here) at a share price pretty akin to today's (just over US$25).

Back at this earlier report I went through at length the 'value' case via the holding in VMWare and underlying cash flow generation.  VMWare's Q2 results were solid enough with margin progression sequentially...

...and an expectation that this would continue.  With 4% of shares outstanding being bought back in FY15 I have no problem in continuing to use the prevailing VMWare market cap as a guide for the value of the EMC stake.  

So with around half of EMC's c. US$47bn market cap covered by the VMWare stake, what price the company's core business?  Well as observed three months ago the core EMC business is hardly fast growing at an aggregate level (and hence why acquisition opportunities are periodically pursued - as I discussed here).  

I also liked the continued solid 7-8% of market cap free cash flow generation which provides opportunities for buybacks/dividends (and acquisitions) but if you look closely at the '2015 updated non-GAAP business outlook' there is a downgrade baked in...  

...or as the company noted it: 

'saw customers become more conservative around refreshing their traditional infrastructures as they plan their IT transformation'

This can come as no huge surprise...and the shares ultimately positive reaction today is indicative of the value situation / low expectations factored in.

As I noted three months ago:

'I think the catalyst for EMC shares may be a return of activism pressure and hence I will be looking to pick up some the US$25 level with a double up level of US$23 (see the EMC chart near the start of the report for the reasons why this technical level is interesting)'. 

That still seems a reasonable position to take to me. 

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