Business Week online Nov 2 edition:
WHY EMC'S INVESTORS EXPECT THE GOOD TIMES TO ROLL
In the spine-tingling world of high-tech investing, a play on computer storage products sounds fairly prosaic. But when you consider the performance of EMC Corp. (EMC), the idea gets a lot more exciting. This Hopkinton (Mass.) company is the leader in so-called enterprise storage, which means that its systems are designed to be robust enough to handle a customer's most important data. Its Symmetrix systems can store up to 6,000 gigabytes of data from any kind of computer. In addition, EMC designs and sells software that lets companies store, retrieve, protect, and eventually use all their data. "It has the technology companies need in order to really deal with the the explosion of information," says Laura Conigliaro, an analyst with Goldman Sachs & Co.
What makes the company stand out to investors now is that storage is apparently one of the few areas of information technology (IT) where companies say they can't cut spending -- even if they need to slash their budgets because of the softening global economy. "Recession-proof is a strong term," says company spokesman Mark Fredrickson, "but the point is that our customers are telling us that spending on enterprise storage is increasingly becoming nondiscretionary."
Better yet, for EMC, IT managers are singling it out as a supplier they plan to continue doing business with, says Conigliaro. Currently, EMC competes mainly with such giants as IBM (IBM), Hitachi (HIT), and Sun Microsystems (SUNW), which offer storage systems as just a piece of their overall business. By focusing solely on storage, EMC has developed technologically superior products and can charge more than its competitors, says Brian Goodstadt, an analyst with Standard & Poors equity research group.
TOP 10 HIT. EMC's surging revenues and returns to shareholders have earned it a No. 9 spot on Business Week's first annual ranking of the world's top 100 info tech companies. And that list was compiled before the company recently turned in record financial results. On Oct. 20, EMC reported quarterly sales of more than $1 billion for the first time. Third-quarter revenues were up 37% from the year-ago period and earnings per share were 38 cents on net income of $201 million, up 52% compared with the third quarter of 1997. Analysts surveyed by First Call had been expecting the company to report quarterly earnings of 36 cents a share.
The investment world is cooing over EMC's performance. "It has basically been my favorite stock for awhile," says S&P's Goodstadt. Steven Milunovich, a technology analyst at Merrill Lynch, agrees. Not only have EMC's revenues been growing by more than 30% a year but its margins have been improving thanks to growth in its lucrative software business. EMC expects to sell $400 million in software this year, up from only $177 million in 1997, and Goodstadt expects software to continue to grow as a percentage of sales as the company brings out new products. "It's one thing to have hardware to hold data," he says. "It's another thing to be able to use the data and manage information to your advantage. That is really what EMC is focusing on now for the future."
EMC's stock price has doubled in the past year and closed on Oct. 22 at 62 5/8, up 1 1/8. That's still below its 52-week high of 63 1/2 on Sept. 24. The stock fell to a recent low of 41 11/16 on Oct. 8 before surging nearly 50% to its current level.
Despite the dramatic two-week recent run-up, analysts believe that EMC's stock price will continue to climb. Its current p-e of 32 based on analysts' 1999 earnings estimates is about equal with their projections for its long-term growth rate (analysts often consider stocks overvalued when their forward p-e exceeds their long-term expected growth rate). But many analysts believe EMC deserves a premium because of its leadership in market share and technology.
"JUGGERNAUT." "EMC's multiple can comfortably be in the mid-to-high 30s, in our view," Milunovich wrote in an Oct. 21 research note about the company titled "The Storage Juggernaut Rolls On." He also pointed out that its gross margin of 52.3% is above his expectations thanks to strong software sales and lack of pricing pressure from competitors. His 12-month price target is 72.
EMC has even benefited from the Year 2000 computer glitch, since companies need to have separate systems with stored data on which to do their testing. Some observers have concerns that this is creating an unusual demand for EMC products that will then go away. But Milunovich says he isn't worried, since in Merrill's latest survey, 80% of chief information officers said storage demand would not slow after they had finished their Y2K purchasing. And EMC President and CEO Michael Ruettgers recently assured analysts that less than 10% of the company's revenues are linked to Y2K.
Milunovich acknowledges a risk that EMC could face more competition in the future. But it has such a strong leadership position in an industry that is expected to grow 35% a year that competition may be a threat only if EMC slips up somehow. "I think that the biggest risk for the company is its own execution," Milunovich says, "which is a pretty good position to be in."
By Amey Stone in New York
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