VMware and EMC

EMC: RBC Upgrades On Prospects For VMware Spin Out
Posted by Eric Savitz
EMC (EMC) shares are higher this morning after RBC Capital’s Thomas Curlin upped his rating on the stock to Outperform from Sector Perform. The focus of his call: the prospects for a spin-out of the company’s stake in VMware (VMW).
He notes that the company can spin out VMware to holders with minimal tax implications starting in early 2009. “Management recently has suggested it does not plan to spin out VMware, but if the stock remains at current levels, we believe it could be forced to do so by activist shareholders,” Curlin writes in a research note. “This possible scenario is a key aspect of our recommendation upgrade as it provides downside protection in a challenging macro context.”
Curlin actually cut his revenue estimates for the company for both Q3 and Q4; his full year revenue estimate is now $14.8 billion, down from $15 billion. His EPS estimate remains 85 cents. He cut his target on the stock to $19 from $21.
Curlin figures that EMC is trading at a value of about $6.25 ex its stake in VMW; but he thinks the non-VMW business is worth $10-$14 a share. “The shares offer an attractive valuation with or without a spin of VMware, and sentiment in the name is subdued given concerns about the macro environment,” he writes.
EMC today is up 68 cents, or 4.5%, to $15.73.