EMC (NYSE:EMC) isn't a hyper-growth story like its majority-owned subsidiary VMware (NYSE:VMW) or emerging storage name Fusion-IO (NYSE:FIO), but it's a dependable leader in a major market. Bears may fret about the magnitude of the IT spending slowdown in 2012 and the potential for management to misspend its growing cash balance, but this stands out as a quality tech holding all the same.

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A Good Close to the Year
EMC doesn't often beat analysts' estimates by a big margin, but the company is a steady performer all the same. As the info storage business was quite strong, fourth quarter revenues rose 14% on an annual comparison and more than 11% sequentially. Mid-range systems grew about 24% this quarter, while the high-range line grew about 11%. Isilon is still a relatively small contributor to EMC, but this acquisition is chugging along at a 100% growth rate right now.

EMC is matching good sales growth with improving profitability. Gross margin grew two and a half points from last year and about one and a half points sequentially. Operating income was likewise quite strong; growing 21% year on year and nearly 29% sequentially. (For related reading, see Zooming In On Net Operating Income.)

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Leadership Matters
EMC's results for the fourth quarter were notably better than the storage performance at IBM (NYSE:IBM), and I will not be surprised if the same holds true relative to Hewlett-Packard (NYSE:HPQ) and Dell (Nasdaq:DELL). Not only are these companies ill-positioned to compete effectively at the higher ranges of the storage market, but EMC is making strides in the lower-end market and apparently not suffering any real margin consequences from it.

The comparison to NetApp (Nasdaq:NTAP), which reports on an off-calendar cycle, will be more interesting. NetApp is likely to see more headwinds from HDD supply issues (something that also impacted IBM). It will also be interesting to see how NetApp's penetration of higher-end markets is going - my suspicion at this point is that EMC is gaining more by targeting NTAP's core mid-range market than it is losing from NTAP's attempts to enter the high end.

Data's Not Going Away
One of the interesting things coming out of the fourth quarter is that EMC's guidance is really not all that strong or demanding. Strip out items like Isilon and it looks like core high-end growth expectations are in the single-digits. That seems relatively conservative even though IT budgets may pull back a bit in 2012, data is likely to be a priority.


Keep in mind, too, that skeptics have been waiting for the end of the "data cycle" to really hurt EMC's results, but they've been waiting for over a decade and a half now. Granted, there've been ups and downs along that path, but the fact remains that data demands just keep increasing.

Some Risks, but Plenty of Potential
I would suggest that the biggest risk to EMC may be a sort of complacency. EMC just doesn't have that much truly threatening competition in its real core markets, though the efforts to grow mid-range and lower range penetration should keep management sharp.

There is a risk that EMC may see a Cisco-like saturation of its markets that leads to many years of unimpressive growth. Though I find the odds of that low, I do see a risk that EMC may get too ambitious with acquisitions designed to keep the business growing. EMC management has been quite smart about its deals so far, but there's always the risk of a bad idea popping up - say, for instance, trying to enter a more consumer-oriented business line.

The Bottom Line
It doesn't take a very robust cash flow model to make EMC look appealingly cheap. Even modest single-digit free cash flow growth should be plenty to fuel further stock gains. The risk, though, is that as growth slows the multiples will collapse - something that has been seen in software names like Microsoft and CA, as well as hardware names like Cisco. (For related reading, see Free Cash Flow: Free, But Not Always Easy.)

This is likely a "when, not if" risk, but the value in EMC remains compelling and this stock is well worth considering as an addition to portfolios.

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At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.