EMC Corp (EMC) was the top provider of disk storage systems in the fourth quarter of 2011. According to research firm IDC, EMC has a market share of nearly 23%, followed by Hewlett-Packard Company (HPQ), which has a market share of 18%, and International Business Machines Corp (IBM), whose market share is 16%. At the end of last year, there were 53 hedge funds with EMC positions in their 13F portfolios, up from 37 hedge funds at the end of the third quarter. In total, these hedge funds invested $1.8$ billion in EMC, which has a market cap of about $60 billion. Ken Fisher was the most bullish money manager about EMC. Fisher Asset Management had about $464 million invested in this stock at the end of 2011. Bill Miller’s Legg Mason Capital Management also had nearly $150 million invested in EMC at the end of last year. Well-known hedge fund managers who opened new EMC positions over the fourth quarter include Charles Clough, Ray Dalio, and Cliff Asness.
Did these hedge funds make the right decision by investing in EMC? Does it make sense for investors to imitate these hedge funds and purchase EMC for their own portfolios? Let’s answer these questions in our following paragraphs by taking a closer look at the company.
EMC has a current P/E ratio of around 26, a premium to the 17.7 of the average of its peers. In 2012, EMC is expected to earn $1.43 per share, which means that its forward P/E ratio is about 20, still relatively higher than the industry average of 14. Though EMC’s valuation does not look very attractive, the company demonstrated strong earnings growth over the past couple of years. For the fourth quarter of 2011, the company’s EPS was improved by over 30% compared with the same quarter a year earlier. Over the past five years, EMC’s EPS grew at an average of above 15% annually and we expect this trend to continue in the future. Analysts expect EMC’s earnings to grow at about 16% per year over the next couple of years. The high growth expectation is reflected in its stock price and explains the relatively high P/E ratios.
EMC has been active in acquiring other firms and expanding its business. The company employs a broader strategy of growth through acquisitions. During the past 16 years, EMC has made around 48 acquisitions. One of its most successful acquisitions was the purchase of VMware Inc (VMW) for a total of $635 million in 2003. Today, VMware is operated as an independent subsidiary and EMC owns about 80% of its equity. We believe EMC will continue to benefit from its majority ownership of VMware as we see strong growth potential in cloud computing and virtualization software. Another successful acquisition made by EMC recently was the purchase of Data Domain in the third quarter of 2009 for a total of $2 billion. This acquisition significantly improved EMC’s backup and archive solution products based on deduplication technology.
As we mentioned at the beginning of this article, EMC has the leading market share in providing disk storage systems. We believe the company will continue to gain additional market share in the near future. At the end of 2010, EMC acquired Isilon Systems (ISLN) for $2.16 billion in cash. We believe the acquisition with Isilon will enable EMC to increase its presence in the small and medium-size businesses segment. We also expect the company to gain market share through its broad hardware and software offerings and its new products in data storage and backup.
One of the major competitors of EMC is NetApp Inc (NTAP). The company is faced with severe competition from EMC as EMC has more aggressive pricing and recently introduced its unified architecture data storage systems. As a result, NetApp seems to be losing its growth momentum in the mid-tier market. Analysts expect NetApp to make $1.81 per share in 2012 and $2.15 per share in 2013, versus $1.71 per share in 2011. So, NetApp’s P/E ratio for 2013 is about 21.1, versus 17.5 for EMC. We believe EMC is a better option than NetApp.
Overall we like EMC. We are positive about the future growth of data storage industry. In our view, with the growth in electronic record keeping, the demand for data storage will continue to be strong. As the leading provider of data storage solutions, EMC will definitely benefit from the growing demand for data storage product and services. We also like EMC’s diversified geographic reach. In 2011, revenue outside the United States accounted for 47% of EMC’s total revenue. This means that investors can gain exposure to foreign markets and protect themselves from a decline in US dollar by investing in EMC.