EMC Stock Price Drop Likely a Gift When the Dust Settles (Updated)

Third-quarter consolidated revenue was up 5% to $5.5 billion, and comparable earnings came in at $0.40 per share. EMC also ended the third quarter with $17.5 billion in cash and investments. EMC forecast that it would repurchase around $3.5 billion of its own common stock in 2013 and the first half of 2014.

This stock buyback matters. It could be a handy driver of share price support ahead. The $3.5 billion cited represents close to 150 million shares at the current price level, and that would be about nine full trading days of volume on average. This should easily help the EMC stock price more than it hurts it.

The theme to consider is that the results were blamed on a decline in U.S. federal spending and a back-end-loaded quarter. Consolidated revenues now are expected to be about $23.25 billion for 2013. While this was just under the expectations, it is still sales growth of almost 7% over 2012.

EMC depends a lot on sales to local and federal governments, but it also sells through many technology players that also overlap in sales with government and other key business entities, because those clients deal with government entities or are subject to sudden slowing trends in times of uncertainty. In short, company IT budget cutbacks may be seen temporarily, even if unrelated industries face sudden business loss as a domino effect.

What is interesting here is that EMC’s new products and efforts actually may insulate it from some of the traditional slowing trends. It seems possible EMC could be shielded at least somewhat from the federal situation going forward. It should have been anticipated that storage sales would grind to a halt. We also think that the continued VMware Inc. (NYSE: VMW) overlap will be a plus for EMC. The latest VMware earnings report was better than expected, but the recent weakness has pulled its stock gains back down to where the pre-earnings prices were. Growth is also seen ahead in the VCE business.

EMC’s 2012 annual report pointed out that the 2.8 zettabytes globally would be somewhere around 40 zettabytes by the year 2020. It showed that some 90% of Big Data is simply unstructured. This is just more proof that the world of data storage growth is nearly endless.

Prior to any downgrades and price target cuts from outside analysts, EMC’s consensus price target from analysts was about $30, and that is just under $30 now. EMC shares lost about 4.75% on Tuesday after the earnings report, and the stock was down more than 2.5% more to $23.40 in early morning trading on Wednesday.

Note that this caused technical damage to the stock chart, as the 200-day moving average was violated ($24.50 current 200-day MA). The latest drop down to $23.40 or so is also where some prior support came in during the middle of summer. EMC shares are weak right now, and they may remain that way for a bit longer, but the long and short is that EMC’s latest drop in the share price may be a longer-term gift for when the dust settles in the days ahead.

UPDATE FOR CLOSE PLUS NEW NOTES: EMC shares closed down only 1.5% at $23.67 after having traded as low at $23.29 on the day. There is technical damage that has been done here,  but we would be comfortable looking at this in minor incremental purchases over a multi-week period. If the bull market continues this will resume upward share prices and the buyback will help that. A future opportunity exists for a VMware Inc. (NYSE: VMW) unlock and possibly another spin-off of its other growth unit ahead (even if we hope they don’t do it). EMC could trade up to almost $30, but there is likely to be a lot of natural profit taking in the $27.50 to $28.00 price range based upon historical data. Being patient may be the best policy here.