BARRON'S: Plugged In: After Cisco Whiffs, EMC Reaches For The Pine Tar
By Mark Veverka
Now that cisco's impressive hitting streak has been broken, is EMC ready to
step up to the plate?
By missing its quarter by a penny last week, Cisco Systems is walking away
from its role as bellwether and heading back to the dugout with the bat on
its shoulder. The San Jose maker of networking gear had been the Joe
DiMaggio of tech stocks, having met or beaten Wall Street consensus
estimates 28 quarters in a row before the miss.
For its part, EMC has been swinging the lumber pretty well during the past
five years or so, meeting or beating the Street 20 quarters in a row. Thus,
chairman Michael Ruettgers isn't about to shy away from the storage giant's
chance to step up and be the big hitter. Everyone seems to be looking for
the next Cisco, just as they had once searched for the next Microsoft. Like
Mickey Mantle trying to follow in the footsteps of the Yankee Clipper, that
is a tall order.
Of course, EMC isn't cheap. At 56.40, its shares trade at 55 times forward
earnings and 10.3 times revenues. But with so few sectors holding up during
the tech slump, portfolio managers with way too much cash on their hands
want to believe that EMC will deliver against the grain. As evidenced by
Cisco's dampened revenue projections, decreased corporate spending is
starting to hurt nearly everyone, save the storage guys, who contend that
they are immune to a sluggish economy and slashed corporate budgets. Of
course, Cisco is beholden to a more concentrated base of telcos as opposed
to storage's broader corporate IT customer base.
Just as Brocade Communications Systems chief executive Greg Reyes told
Barron's last week that his company was on target to meet ambitious
expectations regardless of a slowing economy, EMC's Ruettgers is singing an
upbeat tune. "When you're a hammer, everything begins to look like a nail.
We continue to believe that there is more opportunity than we can touch,"
said Ruettgers at a recent Merrill Lynch storage conference.
The argument is that information technology execs can't get their hands on
enough data storage capacity, and they will spend what is necessary to keep
their computer networks running smoothly. After giving Ruettgers every
opportunity to let himself step out of the batter's box, he unflinchingly
asked for the pine tar and rosin. Not only didn't he shy from comparisons
with Cisco, he welcomed them.
"I think the storage space still is not very well recognized. I think it is
still early," Ruettgers told Barron's in an interview. "Would you have paid
ten-and-a-half times revenues for Cisco in 1992?"
In hindsight, few would balk at that deal now. But the question remains
whether EMC will match Cisco's stellar performance over the past decade,
especially considering that 1992 was still early in the boom cycle and 2001
is heading for the bear cave.
Eager to crown a new batting champion, many investors' want to believe
Ruettgers and are willing to pay up to own the gorilla of storage. But if
EMC fails to deliver and misses any of its near-term targets down the road,
Ruettger's confident assurances will rank right up there with such other
famous false proclamations as "Read my lips: No new taxes" and "I did not
have sexual relations with that woman, Miss Lewinsky."
To be sure, there are doubters. If anything, the Cisco whiff hammered home
the notion that any tech company is vulnerable and there are no bullet-proof
stocks, including EMC, whose shares fell 6.6% the day after the Cisco
earnings salvo.
Making matters worse, we are in the middle of the winter stock conference
season. And at this week's tour stop, the Banc of America Securities tech
conference in San Francisco, the hallways and salons at the Ritz-Carlton on
Nob Hill were buzzing with nervous nellies spreading rumors and hearsay. One
of the biggest rumors of the week was that EMC was "below plan," which is
Wall Street code for "deep trouble."
The speculation reached such a fevered pitch that an EMC spokesperson at the
conference denied the rumor, explaining that the company's sales performance
was adhering to previous patterns and going according to plan.
Still, there were skeptics. A portfolio manager for a major tech-heavy hedge
fund said that his firm checked with EMC customers recently to monitor how
business was going.
"What we picked up was that business was a lot weaker than that, with
bookings in January falling 50% below plan," the fund manager said.
The disconnect between what EMC was saying and what institutional analysts
and stockpickers were hearing at the B of A conference was not exclusive to
EMC.
"If you listen to the companies, you would think that the Nasdaq should be
trading at 4000. But if you listen to the analysts and portfolio managers,
the Nasdaq should be at 1500," our hedge source said. "The companies are
putting their best spin on things, but their body language is a lot weaker
than usual," the hedge manager said. (By the way, what does Regulation FD
say about "body language"?)
Nonetheless, the EMC dichotomy was especially controversial. So we checked
back with Polly Pearson, EMC's vice president of global investor relations,
for clarification, and she could not have been clearer. "People are
listening to what they want to hear, [but] we haven't adjusted our tune
whatsoever," she said.
"When you hear about people doing channel checks, it is hard for them to do
that" with a global company like EMC, where "not one customer accounts for
as much as 1% of our revenues," Pearson said. "An analyst can call 50
customers and still not get an accurate picture," she said.
What's more, EMC has bent over backward to be conservative with its earnings
guidance and has tried not to set the bar too high, Pearson said.
"Nothing is a lay-up. We have to execute, but we are still small relative to
the market opportunity before us. There is a lot of headroom," Pearson
explained.
"And not one research analyst on the planet is saying that the storage
industry is slowing down," she added.
Nor is EMC. Sounds like Ruettgers and his team are ready to take their raps.
-- We think amazon.com's strategy of spending more money than it brings in
is a bit off kilter. We have been saying that since August of 1999. Thus, we
aren't surprised by the recent layoffs and warehouse closures. Nor are we
surprised that the company is trying to dismiss its cash liquidity problems
by attempting to kill the messenger.
Amazon wasted no time in calling Lehman Brothers convertible bond analyst
Ravi Suria's research "silly" because his economic model suggests that the
e-tailer could run dangerously low on cash by the end of the year. Suria's
research may not be without flaw, but have you gone back and read some of
the previous reports published by the sell-side equity analysts lately? If
Suria's report is "silly" then some of the notes pumped out during Tulip
Mania II qualify as science fiction.
Suria's research is based on a key assumption that Amazon's creditors will
squeeze the e-tailer pinching the company's working capital. That may
happen, but only Amazon's creditors can answer that question.
At least that's the opinion of Merrill Lynch Internet analyst Henry Blodget,
who is expected to publish a note early this week countering Suria's
analysis. Blodget argues that cash is a better measure of liquidity for
Amazon than working capital, which is current assets minus current
liabilities. Both analysts agree that Amazon will report negative working
capital at the end of the year, barring any new infusion of cash. The
difference in opinions is that Blodget predicts that Amazon will have $850
million in cash at the end of this year, while Suria forecasts Amazon's
yearend cash at $150 million.
"So long as the company doesn't stretch out payables, cash is a better
indicator of liquidity than working capital," Blodget told Barron's. And
he's betting that the company's creditors -- primarly those companies that
supply the merchandise it sells -- will see it his way. "There is no reason
for creditor's to squeeze Amazon if they understand the company's model,"
Blodget says.
(END) DOW JONES NEWS 02-10-01
01:57 AM
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