What Do Hedge Funds See in this IT Company?
Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Data storage provider EMC (NYSE: EMC) earned a place on our list of the 10 technology stocks hedge funds like for the second quarter of 2012. A total of 51 hedge funds and other notable investors in our database of 13F filers reported a position in the stock. Brookside Capital, a unit of large asset management firm Bain Capital, was one of the funds taking a liking to EMC. Brookside increased its stake in the data storage company, which also provides information security services and intelligence software, by 38% to a total of 9.4 million shares. According to its filing this made EMC one of the top five positions in its portfolio (see more stock picks from Brookside Capital). Another fund with an investment in EMC was billionaire Ken Fisher’s Fisher Asset Management. Fisher owned 22 million shares at the end of June, and the company was one of that fund’s largest holdings as well (check out billionaire Ken Fisher's favorite stocks).
In the second quarter of 2012, EMC saw its revenue increase 10% compared to the second quarter of 2011 led by an 18% increase in its smaller services business. Expenses were held down, and one of the largest increases was a 22% increase in spending on R&D. Stripping out net income derived from the company’s stake in VMware, earnings grew 12% to 29 cents per share. Over the first half of the year, revenue was up 10% and net income was up 21% compared to a year ago. Cash flow from operations grew 33%, with the company pulling in $2.9 billion in net cash in the first half of the year; EMC used the cash to pay down some convertible debt and much of the remainder was invested in liquid securities. At the end of June, it reported $4 billion in cash and cash equivalents and $1.7 billion in short-term investments on its balance sheet. However, its current liabilities were fairly high as well and so the company will likely keep much of this liquidity on hand. EMC trades at a trailing price-to-earnings ratio of 23, which places it out of pure value territory but means that it could still be fairly priced if it continues to grow its earnings per share. The sell-side believes that it will, and based on their expectations its forward P/E is 14 and its five-year PEG ratio is just above 1.
The closest peers for EMC are Hewlett-Packard (NYSE: HPQ) and International Business Machines (NYSE: IBM), though these companies have other business interests as well. HP’s stock has fallen 23% in the past year as the company struggles (among other factors, the PC business is being squeezed by tablets), with the stock price correctly anticipating a fall in revenue last quarter compared to a year earlier. The market continues to be skeptical as the stock trades at only 4 times forward earnings estimates. Giant IBM, about four times EMC’s market cap, carries trailing and forward P/E multiples of 15 and 12, respectively. It saw moderate growth in its earnings last quarter, but the effect was entirely due to an increased margin.
We would also compare EMC to fellow data storage-focused companies NetApp (NASDAQ: NTAP) and Brocade Communications (NASDAQ: BRCD). NetApp’s business has been struggling recently: its revenue increased last quarter versus a year ago but its earnings were down. The market expects it to rebound, and its forward P/E is 14 with a trailing P/E of 22. These multiples are similar to EMC’s despite the company’s poorer recent performance. Brocade, a smaller company at a market capitalization of just under $3 billion, trades at a similar trailing multiple (22), but has been growing at a rapid clip and is priced at 11 times forward earnings estimates as it is expected to outperform EMC going forward. Brocade’s growth is tempting if an investor doesn’t have a preference for market leadership, in which case EMC or IBM might be better picks.
This article is written by Matt Doiron and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool owns shares of EMC and International Business Machines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.