When you apply that framework, what are some companies that you like right now?
One of them is EMC Corp. (EMC), a leader in the storage space. They are a provider of networked information storage systems for large enterprises. The investment premise for EMC is that the company is under-earning versus its historical earnings. Their operating margins have historically averaged around 13%. They are currently doing about 9%. That’s because of a contraction in IT spending, which went negative in 2009 in terms of growth. As IT spending recovers, storage, which is a category within IT spending, will see a faster growth rate. I believe EMC will recover their operating margins to the level of 13%. Within the category, they’re still a leader in the market they compete in. The other thing I like about them is that they’ve consistently generated positive free cash flow, which is good for sustainability, making acquisitions, and buying back shares. EMC recently bought for cash Data Domain Inc., paying $34 a share in cash. Data Domain specializes in data de-duplication, a technology that prevents duplication of files being stored on networks and storage devices. It reduces the storage capacity that companies need when backing up data. And it’s a key functionality to enhance EMC’s product offerings. That business combined with EMC’s existing business in data duplication should be able to generate $1 billion in revenues by the end of 2010. EMC also has a really great balance sheet. My 12-to-18-month target price for EMC is $25.
Tech stocks can be very tangible for investors because they can see how some products make people or companies more productive. Any other picks along those lines?
Research In Motion (RIM), is the maker of the BlackBerry smartphone. This is a somewhat controversial choice. Some investors believe that, as the company goes up against Apple’s iPhone, their pricing and margins will start to fall at a faster rate, which will cause revenue growth to fall faster than expected. But the whole smartphone market is expected to grow by 35% in 2009 and by 42% in 2010. RIM is the No. 2 player in the market. RIM is still interesting–even with its recent earnings disappointments. The mix of products they sell is shifting toward consumers as opposed to corporate clients. Some 80% of new users are individual consumers. If you go back three or four years ago, that number was around 25%. RIM realized that there was incremental growth in the consumer market. You can see the company growing its net income in 2010. The competitive issue that many investors are concerned about is rising competition from the iPhone and the Palm Pre, which is being launched by Verizon soon. RIM is in a competitive market, but I don’t believe their market share is going to fall apart. BlackBerry unit sales in the last two quarters have been growing at a greater rate than overall industry growth. Even if you believe that RIM will grow at the pace of the market overall, you still get 35% increases in the number of units sold and revenue growth of about 30%. As a result, my 18-month target price for the stock is $100.