ModernGraham Valuation: EMC Corporation (EMC)
Company Profile (obtained from Google Finance): EMC Corporation (EMC), and its subsidiaries develop, deliver and support the Information Technology (IT) industry’s range of information infrastructure and virtual infrastructure technologies, solutions and services. The Company manages its business in two broad categories: EMC Information Infrastructure and VMware Virtual Infrastructure. EMC Information Infrastructure provides a foundation for organizations to store, manage, protect, analyze and secure ever-increasing quantities of information, improve business agility, lower cost of ownership and enhance their competitive advantage within traditional data centers, virtual data centers and cloud-based IT infrastructures. Its EMC Information Infrastructure business consists of three segments: Information Storage, Information Intelligence and RSA Information Security. In July 2013, the Company’s RSA security division acquired Aveksa Inc.
Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
- Earnings Stability – positive earnings per share for at least 10 straight years – PASS
- Dividend Record – has paid a dividend for at least 10 straight years – FAIL
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
- Moderate PEmg ratio – PEmg is less than 20 – FAIL
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
Valuation Summary (Explanation of the ModernGraham Valuation Model)
Key Data:
| MG Value | $40.89 |
| MG Opinion | Undervalued |
| Value Based on 3% Growth | $16.68 |
| Value Based on 0% Growth | $9.78 |
| Market Implied Growth Rate | 5.98% |
| Net Current Asset Value (NCAV) | -$2.84 |
| PEmg | 20.46 |
| Current Ratio | 1.53 |
| PB Ratio | 2.17 |
Balance Sheet – 9/30/2013Â
| Current Assets | $16,447,000,000 |
| Current Liabilities | $10,759,000,000 |
| Total Debt | $5,493,000,000 |
| Total Assets | $44,602,000,000 |
| Intangible Assets | $16,137,000,000 |
| Total Liabilities | $22,285,000,000 |
| Outstanding Shares | 2,058,000,000 |
Earnings Per Share
| 2013 (estimate) | $1.34 |
| 2012 | $1.24 |
| 2011 | $1.10 |
| 2010 | $0.88 |
| 2009 | $0.53 |
| 2008 | $0.64 |
| 2007 | $0.77 |
| 2006 | $0.54 |
| 2005 | $0.47 |
| 2004 | $0.36 |
| 2003 | $0.22 |
| 2002 | -$0.05 |
Earnings Per Share – Modern GrahamÂ
| 2013 (estimate) | $1.15 |
| 2012 | $1.00 |
| 2011 | $0.84 |
| 2010 | $0.70 |
| 2009 | $0.60 |
| 2008 | $0.61 |
Conclusion:
EMC Corporation is a very attractive company at the current moment. Â The company does not qualify for the Defensive Investor, due to a current ratio that isn’t quite high enough, lack of a strong dividend history, and a high PEmg ratio. Â However, the company does qualify for the Enterprising Investor after passing all five requirements for the investor type. Â As a result, Enterprising Investors should proceed with further research, such as by reviewing the ModernGraham Valuation of International Business Machines (IBM). Â From a valuation perspective, the company has grown EPSmg (normalized earnings) from $0.61 in 2008 to an estimated $1.15 for 2013. Â This is a solid level of growth that has been very consistent and is greater than the market’s current implied estimate for growth of 5.98%. Â Therefore, it would appear that EMC Corporation is undervalued.
What do you think?  Do you agree that EMC Corporation is undervalued?  Is the company suitable for only Enterprising Investors?  Leave a comment or mention @ModernGraham on Twitter to discuss.
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Disclaimer: Â The author did not hold a position in EMC Corporation (EMC) at the time of publication and had no intention of entering into a position within the next 72 hours.
Photo Credit: Â Andrew Magill
