Neutral on EMC

We believe EMC Corp. (EMC), a leading provider of data storage systems, lacks positive growth catalysts to drive share price higher from current levels. We maintain our Neutral rating on EMC.

EMC was the overall storage software market leader with a 22.7% market share in calendar year 2009, for eight consecutive years, according to research firm IDC, followed by Symantec Corp. (SYMC) (17.9% market share), International Business Machines Corp. (IBM) (13.5%), NetApp Inc. (NTAP) (8%) and CA Technologies (CA) (4%). EMC was also the number one vendor of external storage sales in 2009, followed by IBM and Hewlett-Packard Company (HPQ).

The information storage business is EMC’s largest segment (76.0% of fiscal 2009 revenues), which will get a boost from its market leadership position. As per IDC, EMC occupied the leading position with storage sales of $1.30 billion in the second quarter (ended June 2010), a 40.6% year-over-year gain while its market share rose year over year from 22.0% to 25.7% in the same quarter.

EMC’s second quarter 2010 earnings of 23 cents per share exceeded the Zacks Consensus Estimate of 22 cents per share by 1 cent. Earnings per share increased 76.9% from 13 cents reported in the year-ago quarter, driven by a strong growth in storage spending and an increased demand for data storage equipment.

Net income attributable to EMC (including stock-based compensation expense but excluding intangible amortization charges) for the second quarter leaped 78.6% year over year to $484.4 million. The improvement in results is mainly attributable to the continued focus on technology, increased execution efforts and operational efficiencies.

Revenues grew year over year for the third consecutive quarter, driven by a strong growth in storage spending and an increased demand for data storage equipment. Revenues for the second quarter of 2010 were $4.02 billion, up 23.5% from $3.26 billion reported in the year-ago quarter. The growth in revenues may be attributed to a recovery in corporate IT spending, increasing storage demand across all geographical regions, increase in investments to improve customer service and enhanced product and service portfolio.

We believe that EMC will benefit longer term from improved storage demand, strategic alliances, strong earnings momentum, increased business execution, impressive free cash flow, favorable new product cycle and cloud computing initiatives as well as stringent cost reduction efforts.

The company also raised its 2010 guidance, the second time this year. The company expects to exceed its previous expectation of $16.5 billion in consolidated revenues for 2010. Non-GAAP operating income is expected to be 20% to 21% of revenues for 2010, same as previously projected.

EMC has the potential to benefit from prudent restructuring activities, with financial metrics growing stronger and helping the company to reach its long-term targeted return levels. We believe EMC can grow above the overall storage industry and is a value stock for long-term investors.

However, increasing competition from IBM, NetApp and Hewlett-Packard, intense pricing pressure and lower-than-expected bookings could limit the stock’s relative appreciation in the near term. We remain cautious on lower bookings due to a weak IT spending.

We maintain a Neutral rating on EMC on a long-term basis (6-12 months). Currently, EMC has a Zacks #3 Rank, which implies Hold rating on a short-term basis.

EMC CORP -MASS (EMC): Free Stock Analysis Report

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