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Courtenay: Two Techs for the Price of One

Stocks in this article: EMC VMW

If that insight isn't enough to motivate an investor to consider owning EMC shares, let's add the fact that it owns a 78% stake in another technology superstar, VMware (VMW), which rocketed over 8% higher on Wednesday after EMC announced at an analysts meeting in New York it plans to spin off a new company based on the collection of assets that are known as the "Pivotal Initiative."

What I understand at this point is that Pivotal will incorporate EMC's Greenplum and Pivotal Labs acquisitions, while VMware will contribute its Cloud Foundry, Cetas, Spring and Gemfire groups to the new company, which will headed by former VMware CEO Paul Maritz, who has been running the Pivotal effort within EMC.

The new "Pivotal Initiative" company is anticipated to have around $300 million in revenue this year and 1,250 employees. EMC will own 69% of the new company while VMW will own the other 31%. At the analysts meeting VMware reiterated its revenue outlook for this year and increased its operating margin forecast by one percentage point to 31%. As of the end of 2012 EMC had a trailing twelve-month operating margin of almost 19%. EMC's next earnings report will be on April 24th.

The new "Pivotal Initiative" is likely to help EMC's revenue and earnings per share in 2013. Let's look at a five-year chart and see for our selves how EMC's price correlates with these two important metrics. For earnings I've chosen the trailing 12-month Ebitda number.

EMC Chart EMC data by YCharts

After 2013, which will be a year of investing in internal growth, VMW expects its revenue to increase 15% to 20% in the following two years. The company has a new management team and, according to TheStreet's research department, "we believe that it the new management is purposely conservative and setting low expectations that will be exceeded. EMC owns 78% of VMware, which accounts for 21% of EMC's earnings."

It's an exciting time to own EMC shares, which have rallied on the good news that bubbled from the analysts meeting. EMC stock at $25 is still trading at a little over 12 times forward earnings and its price to earnings to growth (PEG) ratio (five-year expected) is barely at 1, also indicating that the stock is under priced.

At these levels, and with all the many ways EMC can power its earnings and revenue upward, it appears to be an auspicious time to get on board this technology "starship," which is accelerating to the speed of light squared, figuratively speaking. If you're a cautious type, consider doing your own due diligence and buy at price levels that make sense to you.

At the time of publication the author was long EMC.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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