Opportunity Knocks- EMC

From this evening's Goldman Saks update:

38. EMC Corporation EPS (FY Dec) 2007E $0.69, 2008E $0.84 Buy/Neutral
(EMC) 19.51
What's changed
Investor's should buy EMC shares on this morning's market weakness as
more balanced growth, multiple product cycles, and initiatives to increase
shareholder value post the VMware partial IPO are likely to drive more upside and
keep EMC's stock moving at least towards our $22 price target. EMC's share
gains in the midrange are likely to accelerate going forward, with NetApp a bigger
and explicitly-stated target for EMC. Much of EMC's success in the mid-tier
over the past few years has come at the expense of HP but EMC continues to
strengthen its channel, including a bigger proportion of sales through Dell (which
accounted for 15.6% of total revenue this quarter versus 14% last quarter), and build
out its product line with a new entry-level multi-protocol NS20 offering (NAS, fibre
channel SAN, and iSCSI) which goes directly against NetApp at a more competitive
price point. Although it will take time for the new offerings and channel partners to
hit their stride, we could see an impact as early as the December quarter.
 
EMC Update*

Well with todays action we will be creeping towards our price target of $25. But do we hold for much more?
What if someone made a run at EMC just to get the rest of VM Ware? Sounds crazy right?


Pacific Crest’s Brent Bracelin thinks it's possible> he figures that core EMC - the company without its 86% stake in VMW - is worth about 16x enterprise value/free cash flow, ex-the contribution from VMW. Given the current valuation of VMware - it is now a hair under $40 billion - he figures the market is discounting the EMC stake in VMW by 65%.

His conclusion: EMC is becoming vulnerable to being acquired for its VM stake. “We assign an increasing probability to the scenario that EMC could become a vehicle for a take-out of VMware within the next year,” he writes, “given its controlling stake in VMware that trades at a significant discount.” He names IBM (IBM), Hewlett-Packard (HPQ), Cisco (CSCO), Oracle (ORCL) and Microsoft (MSFT) as “potential suitors that make strategic sense.”

Bracelin says the huge increase in VMware shares since its August 15 IPO at $29 has been created in part by scarcity value, with only 10% of the stock in the float. Nonetheless, he says there is still a “material disconnect” between the value of EMC and VMW. He says a discount to the market value of EMC’s stake is reasonable, but thinks the magnitude has become overdone. Without discounting VMW’s shares, the market price implies a 56% drop in the value of core EMC since the VMW initial offering.

EMC’s market cap is now $46.2 billion; its stake in VMW is now worth about $34 billion, accounting for 73% of the market cap of EMC. Bracelin figures core EMC is worth about $34.5 billion; a buyer could acquire EMC, sell off the core operations, and generate enough cash to finance most of the deal.

Something to think about as we inch towards $25. I think this is a big slow stock and we may sell anyway. What do you guys think. EMC. Sell or Hold?
~ stoney
 
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