Unique Value Manager’s Take On EMC…Sans-VMware (EMC, VMW)

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The 3rd annual VALUE INVESTING CONGRESS took place in New York City this week, and 24/7 Wall St. attended and covered this great value investor event.  Fund managers, investment managers, and hedge fund managers gave numerous presentations on Wednesday and Thursday of this week and many VALUE STOCKS were covered from different angles and views.

Whitney Tilson and Glenn Tongue are the managing partners at T2 Partners, LLC, a prominent value investing management fund and are one of the key forces behind the VALUE INVESTING CONGRESS.  Mr. Tilson gave his presentation on Thursday, and one of his key value stocks was EMC Corp. (NYSE:EMC).  But what is interesting is that Tilson (and partner Glenn Tongue) were not just giving the traditional "Buy EMC because they own 87% of VMware (NYSE:VMW)" that we have heard over and over from other pundits.  Tilson discussed what he was referring to "The EMC Stub" where investors could derive a raw purchase price of around $4.22 for EMC shares.

So what is "The EMC Stub" in reality?  The formula that they derived,which will change for future investors because of future price changesin both EMC and VMware, was listed as being long EMC stock and having ashort sale in VMware stock.  Just to be clear, Tilson notedspecifically that they are not recommending short selling VMware andthey weren’t recommending a long position in VMware.  VMware doesn’texactly qualify as a VALUE STOCK by any metrics out there.  So hisformula at the time was "Long 10,000 Shares of EMC" ($19.11) and havinga simultaneous position that was "Short 1,527 shares of VMware"($87.69)  Tilson also noted how many larger funds would not be able todo this because the VMware stock is not available for borrow inquantity, although synthetic positions could be derived from options.His determination was that "The EMC Stub" after you back out VMwarecould be purchased at roughly $4.22.

T2’s calculation gave "The EMC Stub" a cheap valuation of roughly a 7.3P/E ratio, and an Enterprise Value to EBITDA ratio of 3.8.  They alsonoted the $2 Billion share buyback plan in place, high margins, highdemand, continued growth, and solid leadership of EMC over its peers.These are not characteristic that gets to be seen in every single valuestock out there.  After T2 broke out the numbers and gave their ownvaluation methods, their derived intrinsic value was over $12.00.  Thatis almost 200% higher than their current calculation of the value of"The EMC Stub."

What is interesting here, and something we are in total and completeagreement with T2 about, is that Glenn Tongue came out and said thatdespite the CEO of EMC claim of "no plans to sell their VMware dominantstake" this was not going to be the case.  He referred all the way backto the spin-off of McData (MCDTA) (now part of Brocade-BRCD) and notedhow the CEO said they had no plans to exit that stake either.  Yet itstill came to pass.

Many investors, analysts, and reporters tend to trust CEO andmanagement comments as gospel, and it is nice to see another knownfigure come out and say they would expect to reverse this stance downthe road.  There are tax reasons, dilution issues, and many otherreasons that a full spin-off could not be executed immediately, but weagree entirely with T2 here that sometime a year or so from now therewill be a different stance of EMC and its majority ownership of VMware.

We did conduct a review of our own on EMC Corp. (NYSE:EMC) immediately before the VMware partial spin-off for our Special Situation Investing Newsletter subscribers.  That situation played out exactly as we expected, although our own VMware Conundrum stayed a conundrum for longer then we expected it would.  We’d also encourage you to read the 24/7 Wall St. exclusive interview with the CEO of VirtualIron, the private virtualization company that may end up being perhaps one of the few viable answers to a dominant VMware.

The next VALUE INVESTING CONGRESStakes place on May 6 & 7, 2008 in Pasadena, California, and wewould thoroughly recommend that any value investing strategists andmanagers consider attending.  If I heard that numbers right, that isalready 25% sold out… and May will get here much faster than youthink.

Other notes from the Value Investing Congress:

Jon C. Ogg
November 30, 2007

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