After Its Miss, EMC's Still a Hit

NEW YORK (TheStreet) -- Weak IT spending continues to be the major inhibitor for many tech companies, including EMC (EMC), which are looking to demonstrate growth. Missing on earnings has been the end result.

But the market distributes the punishment evenly and seldom discriminates or cares for the reasons. The challenge for investors is trying to figure out which companies are better positioned to capitalize when IT spending resumes.

Although its recent earnings would suggest otherwise, I believe EMC deserves consideration.

Headwinds

For the period ending in September, EMC reported net income of $626.3 million, or 28 cents per share, on revenues of $5.28 billion. Both EPS and revenue climbed 3% and 6% year over year, respectively. However, both missed analysts' estimates of 42 cents per share on revenue of $5.46 billion, according to FactSet.

Even though this is not a company that misses very often, this quarter's miss was not a surprise. Clearly, it is not immune to the same struggles of weak spending that have affected other tech titans including IBM ( IBM), Microsoft ( MSFT) and Cisco ( CSCO). Nonetheless, the company seems to doing pretty well in its core operations as evident by the growth of 3% and 2% in its storage and network storage segments.

Even more impressive was the 5% growth that EMC's high-end storage business produced. But as tends to be the case during tough competitive environments, EMC missed estimates on gross margins as a result of its somewhat lethargic pace in revenue.

If there was one bright side during the quarter, it was with virtualization giant VMware ( VMW), which is majority-owned by EMC. VMware reported numbers that topped analysts' estimates as the company continues to grow despite and acquire business despite the economic slowdown. VMware saw 20% revenue growth as sales reached $1.13 billion and reported net income of 70 cents per share, topping estimates of 63 cents.

Moving Forward

EMC benefited greatly from the VMware's performance as the latter makes up 20% of the former's reported revenue. But will this trend continue and will VMware have to continue to exceed expectations to carry EMC?

David Goulden, president and COO said:
"For the third quarter, EMC's business continued to grow faster than overall (technology) spending growth and we gained market share in what turned out to be a more cautionary environment than we expected heading into the quarter"

This statement seems to support the company's weaker-than-expected guidance. EMC says it expects full-year earnings of $1.24 to $1.26 per share with adjusted earnings coming in the range of $1.68 to $1.70 per share, slightly below estimates of $1.72. Likewise, the company anticipates revenue of $21.60 billion to $21.75 billion, below analyst' estimates of $22.03 billion.

There are a couple of ways to look at this report. The first and obvious way is that it could have been much worst. Even though the company missed estimates, the fact that it continues to grow sales (albeit slower than usual) is a good sign. This also indicates the company remains a dominant power within the sector and is gaining market share on rivals such as NetApp ( NTAP) and Hewlett-Packard ( HPQ).

Bottom Line

There is no company in the realm of big data that is better positioned than EMC from the standpoint of its product cycles and growth capabilities.

Astute investors should consider accumulating this stock on weakness as it remains one of the steadiest performers on the market today. The company is poised to regain its superior sales growth and profitability once IT spending recovers.

Investors should look for this stock to trade at $30 during the course of the next eight to 12 months, even on the most conservative assumptions.

At the time of publication, the author held no position in any of the stocks mentioned.

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

Richard Saintvilus is a private investor with an information technology and engineering background and has been investing and trading for over 15 years. He employs conservative strategies in assessing equities and appraising value while minimizing downside risk. His decisions are based in part on management, growth prospects, return on equity and price-to-earnings as well as macroeconomic factors. He is an investor who seeks opportunities whether on the long or short side and believes in changing positions as information changes.

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