EMC Shares Stabilize

Shares of EMC Corp. (NYSE: EMC) stabilized on Monday after Friday's dramatic earnings warning, which had resulted in the stock losing 25 percent of its value last week. On Monday the stock bounced up 0.72 (3.33%) to $22.32.

In the aftermath of the warning, however, the company's future was anything but clear. The severity of the warning elicited a mixed reaction on Wall Street -- some analysts have downgraded the stock while others have maintained Recommended ratings.

The company announced Friday that earnings will fall as much as 76 percent below estimates, with earnings per share coming in at $0.04 to $0.06 for the second quarter, well below First Call's consensus estimate of $0.17 a share. Revenue is now expected to be about $2 billion -- when most analysts were expecting around $2.4 billion, after already lowering estimates.

The conflicting messages from investment analysts suggest that the storage market is not immune from the economic slump that's causing problems for the rest of the IT market.

Bear Stearns maintains its Attractive investment rating on EMC, saying company fundamentals should improve once the economy picks up.Goldman Sachs & Co. agrees with this sentiment and keeps EMC on its Recommended list of stocks. EMC has collapsed its pricing and is in a better competitive position now than it was two quarters ago," says Laura Conigliaro, senior storage analyst at Goldman. “We are not looking for a giant upside in this stock, but EMC is in a sector which is a high priority for IT managers... When spending grows, storage will get a disproportionate share, and EMC will do particularly well out of this.”

EMC blames the downturn in the economy for its falling profits and revenues, but the storage giant could also be feeling the pinch from increasing competition and the falling price of hardware.

“EMC is operating a razor-blade model of giving away its hardware to try and increase the sales of its software, where it can make the margins up,” says Paul Mansky, analyst with CIBC World Markets. “But clearly it couldn’t offset the falling hardware prices with software sales this quarter."

“In the past, hardware sales spurred software, which in turn generated more hardware demand, helping EMC build a powerful operating model that once earned 59 percent gross margin,” Merrill Lynch & Co. Inc. analyst Thomas Kraemer wrote in a note to investors on Friday. “The revenue shortfall did not startle us, but the EPS results surprised us. The EPS shortfall indicates that hardware pricing,volume shipments, and software sales fell precipitously below expectations.”

As a result, Kraemer downgraded EMC from Buy to Neutral. On the back of the EMC news, Kraemer also downgraded McData Corp. (Nasdaq: MCDT) from Buy to Accumulate. EMC is McData’s largest customer, accounting for more than 70 percent of its revenue.Mansky at CIBC urges caution. “Using EMC as an indicator for the entire market is a mistake,” he says. (CIBC has just initiated coverage of Brocade Communications Systems Inc. [Nasdaq: BRCD], QLogic Corp. [Nasdaq: QLGC], and Network Appliance Inc. [Nasdaq: NTAP] -- see CIBC on SAN Stocks: 'Buy' .) “Its problems are EMC-specific and should not be applied across the rest of this sector.”

— Jo Maitland, Senior Editor, Byte and Switch http://www.byteandswitch.com