Store Up on Data Storage Stock

06/30/2006 12:00 am EST


Mark Mowrey

Senior Analyst, Al Frank Asset Management

"There were several newcomers added to our recommended list this past month, and one that we are particularly interested in is EMC Corp . (EMC NYSE)," says Mark Mowrey, editor of The TechValue Report, a service from the Prudent Speculator family. Here’s his review of the data storage firm.

"Compared to the overall revenue generated by its primary competitors, EMC is a small fry. But in the storage systems space, EMC's size deceives its importance. With just under 21% of the worldwide market, according to recent figures released by research firm IDC, EMC leads the pack in sales of external storage systems.

"And in the overall storage systems market, $23.7 billion dollars-worth says IDC, EMC is the third largest player at 14.2%, versus HP's leading 23.1% share and IBM's 20.3% take. We think that market has a few years' worth of significant growth ahead. That's based on the facts that we keep taking all these digital pictures and videos and storing them on the Net, while the compliance and archival needs of corporations continue to burst forth.

"Yet despite the broadly positive outlook for its market, and the stronghold the company currently maintains within it, investors have been uninterested in the stock, which is well off a March high of $14.75. Perhaps that's because among the four major players in the external market, EMC showed the slowest growth in 2005, at 10.2% year-over-year.

"It's hard to believe it's the stock's relative valuation metrics, which currently stand at 21 times trailing earnings, and are trending toward the mid-teens as the company continues to benefit from market growth. EMC may, in fact, be suffering from the inability of investors to get a handle on the company's longer-term growth plans.

"Management recently detailed a strategy focused on sustained double-digit revenue growth, while reaffirming current quarter and fiscal year guidance. EMC is focusing on data management within the enterprise, though it's taking a split hardware/software approach to the industry, versus SYMC's all software tack.

"We just don't get the sense that investors believe in the broader trend and these companies' abilities to sell it to corporate IT managers. All makes sense to us though. We even believe that EMC shares might just warrant a premium for the forward looking, evolutionary take on data management. Not that we need to offer that premium just yet.

"With $1.52 per share ($3.6 billion in sum) in cash on the balance sheet, and another $3.7 billion in long-term investments, made up mostly of debt instruments, EMC sports a super-attractive balance sheet, which made our wading into the name that much easier. Our target price is $26, and we're buyers up to $12.86."

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