This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

EMC: Buybacks Provide Attractive Target For Intrepid Investors

By Alex Gavrish, Etalon Investment Research; author of "Wall Street Back To Basics"

Importance of share buybacks

A lot of attention is being paid lately to share buybacks conducted by companies. Since the financial crisis of 2008, many companies went through the deleveraging process and improved their balance sheets by paying off debt. At the same time, interest rates remained extremely low. This facilitated and continues to facilitate a process where companies opportunistically take advantage of credit availability and channel it to payment of dividends, share buybacks, or recapitalizations. Significant share buyback programs by companies are now announced almost daily. Market indexes that track the performance of companies that repurchase shares as well as specific ETFs have been developed. For example, PowerShares Buyback Achievers Portfolio ETF PKW is based on an index that is comprised of US securities that have effected a net reduction in shares outstanding of 5% or more in the trailing 12 months. This buyback ETF provided a +176% return over the past 5 years and had significantly outperformed the S&P 500 Index, which returned only +106% over the same period. Index providers and ETFs add or delete companies from the index "retroactively" depending on their buyback activity in the past, usually the last 12 months. More active investors might do well by looking "proactively" for companies that plan to repurchase their shares in the near future.

Current valuation

Based on a recent price of $25.55 per share, EMC Corporation (EMC - Get Report) has a market capitalization of $53 billion and an enterprise value of $49 billion. EMC also has approximately $6.9 billion in long-term investments on its balance sheet, which consist of debt securities with maturities longer than 1 year, part of them being held by VMware, Inc. (VMW - Get Report), EMC Corporation (EMC - Get Report)'s subsidiary. Based on diluted amount of shares outstanding after adjustment for convertible debt and taking into account long-term investments, the company's adjusted market capitalization and enterprise value stand at $55 and $43 billion, respectively. Using this adjusted enterprise value figure, the company is valued at an EV/EBITDA multiple of x7.9, based on 2012 financial results and at an EV/EBITDA ratio of x8.3 based on annualized 9 months of 2013 financials. In the first nine months of 2013, EMC generated a free cash flow of $3.7 billion and expects to generate a total free cash flow of $5.5 billion for 2013. EMV owns a 80% stake in VMWare, which, based on a recent price of VMWare's shares, is valued at $33 billion and represents 62% of EMC's current market capitalization. Without going into more detailed calculations, the bottom line is that EMC Corporation (EMC - Get Report)'s "stub" without VMWare's business is valued at an even lower EV/EBITDA multiple than the "consolidated" EMC.

Share buybacks

EMC has a large share buyback authorization in place. Currently, the outstanding buyback authorization program calls for repurchase of 197 million shares. Over the last 5 years fourth quarter of 2013 not included EMC Corporation (EMC - Get Report) repurchased $8.6 billion worth of stock. Of this total amount, $5.6 billion was allocated to buyback of EMC's shares, $1.2 billion to repurchase by EMC of VMware, Inc. (VMW - Get Report)'s shares, and the remaining $1.7 billion in share repurchases was done by VMWare itself. According to guidance provided by company, EMC expects to repurchase an aggregate of $3.5 billion of the company's common stock in 2013 and the first half of 2014. During the first 9 months of 2013, EMC Corporation (EMC - Get Report) repurchased $2 billion worth of stock, and the guidance leaves investors with a $1.5 billion buyback commitment. Taking into account that EMC's shares stayed almost flat in the fourth quarter while the S&P 500 returned 9%, it is safe to assume that the majority of remaining share repurchases will be done in first half of 2014. If EMC will continue to generate free cash flow at a similar rate going forward, share buybacks might become even more aggressive. For an active investor willing to go beyond share buyback ETF or index investing, EMC Corporation (EMC - Get Report) might provide an interesting alternative.

The post EMC: Buybacks Provide Attractive Target For Intrepid Investors appeared first on ValueWalk.

-By Alex Gavrish

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Try it NOW
Only $9.95
Try it NOW
14-Days Free
Try it NOW

Check Out Our Best Services for Investors

Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
SYM TRADE IT LAST %CHG
EMC $25.52 0.00%
PKW $49.69 0.00%
VMW $82.98 0.00%
AAPL $126.37 0.00%
FB $83.20 0.00%

Markets

DOW 17,976.31 +263.65 1.49%
S&P 500 2,086.24 +25.22 1.22%
NASDAQ 4,947.4410 +56.2220 1.15%

Partners Compare Online Brokers

Free Reports

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs