EMC Corporation (EMC) Quarterly Valuation – March 2014

500px-EMC_Corporation_logo.svgBenjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how EMC Corporation fares in the ModernGraham valuation model.

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. In February 2014, the Company’s VMware, Inc completed the acquisition of A.W.S. Holding, LLC.

EMC Chart

EMC data by YCharts

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years – FAIL
  5. 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
  6. Moderate PEmg ratio – PEmg is less than 20 – FAIL
  7. 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 = 4/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary

Key Data:

Recent Price $27.58
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 7.74%
Net Current Asset Value (NCAV) -$3.10
PEmg 23.98
Current Ratio 1.46
PB Ratio 2.50

Balance Sheet – 12/31/2013

Current Assets $17,278,000,000
Current Liabilities $11,799,000,000
Total Debt $5,494,000,000
Total Assets $45,849,000,000
Intangible Assets $16,204,000,000
Total Liabilities $23,548,000,000
Outstanding Shares 2,020,000,000

Earnings Per Share

2013 $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 – ModernGraham

2013 $1.15
2012 $1.00
2011 $0.84
2010 $0.70
2009 $0.60
2008 $0.61

 

Conclusion:

EMC Corporation is suitable for the Enterprising Investor but not the Defensive Investor.  The Defensive Investor is turned away by the low current ratio, insufficient dividend record, and high PEmg ratio.  The Enterprising Investor remains interested, but it should be noted that the level of debt relative to the current assets is dangerously close to eliminating the company from the Enterprising Investor’s list.  For now, though, the Enterprising Investor following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research, including a look at 5 Undervalued Companies for the Defensive Investor as well as 5 Low PEmg Companies for the Enterprising Investor.  From a valuation perspective, the company appears to be significantly undervalued.  The EPSmg (normalized earnings) have grown from $0.60 in 2009 to $1.15 for 2013, a level of demonstrated growth that outpaces the market’s implied estimate of 7.74% earnings growth.  As a result, the ModernGraham valuation model returns an estimate of intrinsic value that is well above the market price.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on EMC Corporation (EMC)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

If you like our valuations, why not check out ModernGraham Stocks & Screens?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!

Disclaimer:  The author did not hold a position in EMC Corporation (EMC) or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.

Logo taken from the Wikipedia; this article is not affiliated with the company in any manner.

 


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