Post from the Motley Fool thread via Raging Bull thread:
Recommendations: 26
sklam asked me to post my ongoing analysis of EMC that I am currently posting on the Grape's Fisher Kings board. If any of are familiar with Philip Fisher and his book "Common Stocks and Uncommon Profits" you will know that he outlines 15 questions that every investor should ask about a company in order to pick the best growth stocks for the long-term. I just started my analysis of EMC and here are the first three questions.
Caution: Extremely Long Post!!!
Point 1. Does the company have products or services with sufficient market potential to make possible a sizable increase in sales for at least several years?
EMC is the leading maker of data storage systems. They have a commanding lead with a 35% market share while IBM is second with 22%. This industry is projected to offer growth at a compounded annual rate of 21% through the year 2003 according to Argus. The belief is that EMC can command a greater annual % growth than the market because it is solely a storage system company, unlike its competitors. This growth will be fueled by the continuing proliferation and build out of the Internet and the need for faster, updated, more complicated software, which is causing a high demand for storage. This demand is going to come from many of the internet companies, or dot com businesses, where EMC gets about 12% of it's total revenues, because they are expected to spend heavily for storage.
Facts: (Taken from the EMC website)
 EMC's Celerra file server is the fastest growing network attached storage product according to IDC; it has grown by 300% in just three years.
 The new generation Symmetrix 8000 family, which provides storage for mainframe computers, extends EMC's performance leadership by three to four times the performance of competitive systems. It is also the world's highest capacity disk storage system that supports up to 19.1 terabytes of storage in the same 17.3 square-foot floor space as its predecessor.
 EMC has extended its market share with the acquisition of Data General Corporation. This acquisition has moved them into the mid-range storage market and has created a 40% increase in market opportunities.
 Two-thirds of the world's electronic information lives on EMC.
 In 1999, 80% of EMC's sales came from products the company introduced that same year.
 EMC customers include:
100% of the world's largest banks
100% of the world's largest telecom companies
95% of the Fortune 100
90% of Wired Index
97% of the S&P Global 100 Index
90% of BusinessWeek 50
90% of top 10 ISP's
85% of FTSE 100
83% of DAX 30
In the most recent Quarter:
 Revenue from ESN (enterprise storage systems), which include Connectrix, Celerra, and Symmetrix, grew by 32%.
 Revenue from software, which is only 12% of revenues and offers customers information management, sharing, and protection, grew 74%.
I believe that with the market share that EMC commands and the growth potential of this Industry, which is being driven by the internet and all information becoming available across it, EMC will continue to gain the lion's share of growth with their superior products. 1 Point.
Point 2. Does the management have a determination to continue to develop products or processes that will still further increase total sales potentials when the growth potentials of currently attractive product lines have largely been exploited?
I'm going to keep the answer to this question short and sweet. After reading much of the information about EMC's continued progression into different markets, alliances, new software and hardware introductions, and the upgrade of the functionality and scalability of it's current products; I believe that they are well aware of what they need to do to continue growth in the future.
EMC will continue to upgrade their Symmetrix Enterprise Storage System, which was introduced and has been the leader in high-end storage since 1991, so that it can grow in functionality, scalability and performance. As you can see from Point 1, the most recent Symmetrix 8000 family has a performance leadership which is three to four times that of its next competitor. Also, the Symmetric 8000 supports up to 19.1 terabytes of storage, again being the leader as the world's highest capacity storage system. This is something that I love to see in a company, such a large competitive edge that does not allow entry by competitors, whether they are new or old.
I could ramble on and on in this section about their growth and improvements but instead let's concentrate on two topics, alliances and the development of new business. Of course I would love to get into their research and development plans and percentages but that will be covered in Point 3 as we all know.
EMC has built alliances with such companies as Microsoft, SAP AG, Oracle, and most recently written about Nortel Networks. Their strategy with these alliances is to “work closely with leading software companies to provide added value to its customers by integrating EMC solutions with software applications that customers rely on to manage their day-to-day business operations. I downloaded and read the most recent white paper titled “Storage Systems on the Optical Internet: the new building block for the Internet,” which I believe is next greatest event in telecommunications. This new venture is with Nortel Networks, which is one of the leading systems providers for fiber optic networks. As stated within in the paper, “ The Next Generation Internet will be composed of two critical elements: 1) the agile-lambda Optical Internet core; and 2) the content edge. To give Internet users reliable access to critical distributed data in the content edge; these two elements must be tightly welded together. This new architecture will link storage-as a fundamental element in the Content Edge-directly to wavelengths of the Optical Internet core.” It continues to go on about how “Wavelengths will become the communications circuits of the future,” and how Nortel is doubling optical performance every eight months. Now, this is the only alliance I have researched because the future of data transmission over optical networks is what I believe is going to be the next big thing in telecommunications. I find it fantastic that EMC is taking part in seeing that the storage of information grows with it.
In 1999, because EMC recognized that it need to penetrate more markets than just high-end data storage, they acquired mid-range supplier Data General. In this acquisition they gained access to this market with Data General's Clariion Fibre Channel Storage Systems and Aviion computer systems. I enjoy companies who move into new markets of growth by acquisition because it shows to me that their management has the vision to continue their growth into the future. I enjoyed the excerpt from the 1999 Annual Report on New Business Development. It states that EMC is “focused on developing new businesses aligned to the Company's markets. This is accomplished by maintaining a long-term view on the industry's potential and continually assessing the market. Key objectives are to identify and close significant business development opportunities (mergers, acquisitions, and investments) that are aligned with the Company's strategic direction, including hardware, software and services businesses that complement and augment those of the Company, and to manage, develop and integrate such new businesses into EMC.”
In conclusion, I would like to add that EMC plans to spend $1.7 billion on research by the end of 2001. Now it is projected that 80% of this money will be spent on the R&D of software. 1 Point.
Point 3. How effective are the company's research and development efforts in relation to its size?
As EMC's revenue has increased 195.4% from 1996 until 1999, you will see that the percentage of Research and Development has become an increased percentage of sales.
1996 = 7.1%
1997 = 7.5%
1998 = 7.9%
1999 = 8.5%
Now let's compare this to Network Appliance. They have grown their revenues 520.7% from 1996 until 1999 and their percentage of Research and Development are as follows:
1996 = 9.6%
1997 = 10.0%
1998 = 10.5%
1999 = 10.7%
Now, let's do a “One Dollar Premise” to see how much earnings was created for each dollar of Research and Development like MarkMarcellus suggested, thank you for the link to TMFMycroft's article it's beyond helpful.
EMC
Research and Development Net Earnings
1996 = $161,088.................1996 = $386,229
1997 = 220,884.................1997 = 587,511
1998 = 315,188.................1998 = 653,978
1999 = 572,517.................1999 = 1,010,570
Total = $1,269,677..............Total = $2,638,288
So, $2,638,288 / $1,269,677 = $2.08 of retained earnings for each dollar of R&D. Looks great, but let's continue to compare that to Network Appliance.
NTAP
Research and Development Net Earnings
1996 = $8,968...................1996 = $250
1997 = 16,649..................1997 = 20,965
1998 = 30,457..................1998 = 35,613
1999 = 62,065..................1999 = 73,792
Total = $118,139................Total = $130,620
So, $130,620 / $118,139 = $1.11 of retained earnings for each dollar of R&D. Well, this is still very good because it is above Warren Buffet's targeting of $1.00 for each $1.00 of R&D, but not as good as EMC. I give EMC 1 Point. |
