Why Analysts Are Getting More Cautious on EMC

The value of EMC Corp. (NYSE: EMC) depends to a large degree on the value of its VMware Inc. (NYSE: VMW) subsidiary. EMC itself is being acquired by privately held Dell for $24.05 a share plus 0.111 share of VMware’s tracking stock, currently trading around $45.50. That implies a price for EMC of around $29 a share.

That arithmetic did not escape the notice of most analyst firms following EMC’s Wednesday earnings report. Price targets on EMC stock homed in on $29. Here’s a brief overview:

  • Brean cut its price target from $31 to $29 and maintained a Buy rating.
  • Jefferies lowered its price target from $29 to $28 and maintained a Hold rating.
  • Maxim cut its price target from $32 to $31 and raised its rating from Hold to Buy.
  • Mizuho lowered its price target from $30 to $28.50 and raised its rating to Buy on weakness.
  • Raymond James cut its price target to $29.
  • S&P Capital IQ reduced its 12-month price target by $1 to $29 and cut its 2016 operating earnings per share estimate to $1.94 from $2.07 and initiated 2017’s EPS estimate at $2.08.

The analysts at Morningstar offered some detail on EMC’s earnings and outlook:

EMC delivered a seasonably strong quarter to cap off a relatively uninspiring year, affected by weakness in emerging markets and negative currency effects. More importantly, the company is facing secular winds of transformation occurring in the storage space due to rising adoption of cloud storage, software-defined data centers and price declines of flash-based storage solutions. We expect the traditional storage segment of the company to continue a slow decline in a long run despite expected introduction of new and re-architected products based on flash in 2016. Our narrow economic moat and negative trend ratings remain unchanged.

EMC’s shares closed up 2.2% on Friday, at $24.77 in a 52-week range of $22.66 to $29.24. The consensus price target on the stock is $28.50, but all these changes have probably not yet had an effect.

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