VMware,  Inc.

   (NYSE:  VMW)                                  
 Last  Price:  $83.06   VIEW:    BUY  

 

 

 

7/30/2013  

VMware,   Inc.   is   the   provider   of   virtualization   infrastructure   solutions   utilized   by   organizations   to   help   transform   the   way   they   build,   deliver   and   consume   information   technology   (IT)   resources.   The   Company's   solutions   enable   organizations   to   aggregate   multiple  servers,  storage  infrastructure  and  networks  together  into  shared  pools  of  capacity   that  can  be  allocated  dynamically,  securely  and  reliably  to  applications  as  needed,  increasing   hardware   utilization   and   reducing   spending.   Once   created,   these   internal   computing   infrastructures,  or  clouds,  can  be  dynamically  linked  by  its  customers  to  external  computing   resources   that   run   on   a   VMware   virtualization   platform.   In   2012,   the   Company   acquired   Nicira.   In   December   2012,   the   Company   launched   the   Pivotal   Initiative   with   EMC   Corporation   (EMC),   and   plan   to   commit   technology,   people   and   programs   from   both   companies  focused  on  Big  Data  and  Cloud  Application  Platforms.  

  Sector:    Technology   Software   Highlights:   VMware  is  the  provider  of  virtualization  infrastructure  solutions  utilized  by  organizations  to   help   transform   the   way   they   build,   deliver   and   consume   information   technology   (IT)   resources.   The  stock  closed  yesterday’s  trading  session  at  $83.06.  In  the  past  year,  the  stock  has  hit  a   52-­‐week   low   of   $64.86   and   52-­‐week   high   of   $103.02.   The   intrinsic   value   of   the   stock   is                                                                  Industry:   Technical   &   System  

higher   than   the   current   price.     VMW   has   a   market   cap   of   $35.54   billion   and   is   part   of   the   Technology  sector.   GROWTH  AND  BALANCE  SHEET   The   company   reported   that   it   earned   $244.1   million,   or   0.57   cents   earnings   per   share,   for   the  quarter  that  ended  June  30.  That's  up  from  $191.7  million,  0.45  cents  earnings  per  share   for  the  same  quarter  last  year.  Revenue  increased  1.1  percent,  to  $1,243  million  from  $1,123   million.   VMW’s  consensus  earnings  per  share  for  the  quarter  ending  September  2013  of  0.51  to  0.63   cents  per  share.  GAAP  operating  margin  was  21.7  percent,  compared  to  18.9  percent  in  the   second   quarter   of   fiscal   2012.   The   increase   is   mainly   due   to   decrease   in   costs.   Cash   flow   from  operating  activities  was  $534  million,  compared  to  $391  million  in  the  second  quarter   of  fiscal  2012.   VALUATION   VMW   PE   stands   at   45.67   above   the   industry   average   of   18.53   and   above   the   S&P   500   average   of   18.59.     The   company   is   currently   trading   above   the   preferable   P/E   ratio   of   15x   and   over   the   last   five   years,   the   company’s   shares   have   traded   in   the   range   of   27.78x   to   144.10x  trailing  12-­‐month  earnings.  VMW's  current  Price/Sales  of  7.35  is  above  the  average   of  its  industry,  of  1.25.    VMW’s  head  to  head  comparison  to  its  main  competitors  shows  that   the  company  has  better  gross  margin  and  operating  margin  than  most  of  them,  and  second   highest  EPS.     The  stock  is  currently  trading  38%  below  its  intrinsic  value  of  $134.76  this  suggests  that  the   stock   is   undervalued   at   these   levels.   The   beta   of   1.47   implies   higher   volatility   of   the   stock   with  respect  to  the  S&P  500.     VMW  has  shown  satisfying  earnings  consistency  over  the  last  five,  except  for  the  one  dip  in   2009,  which  can  be  attributed  to  the  global  financial  crisis.  VMW’s  earnings  per  share  over   the  last  five  years  have  grown  by  23.12.  The  current  quarter  earnings  in  comparison  to  the   same  quarter  last  year  have  grown  by  27.30%  which  is  above  the  required  level  of  15%.   VMW’s  current  price  levels  are  above  the  preferable  level,  19.  4%  below  the  52  week  high  of   $103.02,  and  the  technical  indicators  are  positive.  The  majority  of  the  analyst  ratings  are   hold.  VMW’s  Total  Debt/Equity  of  7.31  is  below  the  required  maximum,  and  it  is  well  below   the  industry  average  of  22.47.    VMW  does  not  pay  dividends.   RECOMMENDATION   for   next   6   months:   We   initiate   our   coverage   with   Buy.   The   company   has   demonstrated   positive   signs   and   the   valuation   is   cheap   at   current   price   level.   VMW   is   down  12.21%  year-­‐to-­‐date.  Our  overall  score  for  VMW  is  7.64.   For  options  trading  we  suggest:     • • Buy  the  August  2013  call  with  a  strike  of  85  priced  at  $0.31  per  contract   Net  credit  to  start:  $0.31  

    VMware,  Inc.   VALUATION   Market  Cap:   Enterprise  Value     P/E     PEG  Ratio     Price/Sales     Price/Book     Enterprise  Value/Revenue   Enterprise  Value/EBITDA     Dividend  Yield     Held  by  insiders     NEWS  and  CALENDAR   Fri,  Jul  26,  2013  –  VMWARE  Larger  Than  S&P  500  Component  Coca-­‐Cola  Enterprises   Wed,  Jul  24,  2013  –  Why  VMware  Shares  Skyrocketed   Wed,  Jul  24,  2013  –  VMware  Soars  18%:  Two  Upgrades,  'Cloud'  Gathers,  Outlook  Brightens   Wed,  Jul  24,  2013  –  4  Stocks  Raising  The  Technology  Sector  Higher     VMW  Strengths   Adaptability  on  variety  of  platforms         Leader  in  virtualization  software           Strong  brand  equity             VMW  Weakness   • • • • •               Low  product  diversification           Low  brand  communication     VMW     35.54B   30.53B   45.67   1.28   7.35   5.8               Beta   1  Month  Stock  Returns   Year  to  Date  Stock  Returns   1  Year  Stock  Returns   3  Year  Stock  Returns   52-­‐Week  Change     1.47   23.38%   -­‐12.21%   -­‐13.64%   7.81%   -­‐8.48%   22.19%   103.02   64.86   70.57   75.86  

6.28   S&P500  52-­‐Week  Change     24.86   52-­‐Week  High     N/A     52-­‐Week  Low       50-­‐Day  Moving  Average     34.92%   200-­‐Day  Moving  Average    

        Competitor  Comparison   VMW   Market  Cap:   35.54B   Employees:   13,800   Qtrly  Rev   Growth   0.11   Revenue     4.86B   Gross  Margin     0.85   EBITDA     1.23B   Operating   Margin     0.19   Net  Income     780.20M   EPS     1.81   P/E     45.67   PEG     1.28   P/S     7.35       CTXS   13.14B   8,212   0.19   2.78B   0.87   619.65M   0.13   316.42M   1.67   41.5   1.61   4.67   MSFT   263.96B   94,000   0.1   77.85B   0.74   30.52B   0.34   21.86B   2.58   12.25   1.32   3.37   Industry   99.14M   398   0.19   55.37M   0.43   1.80M   0.03   N/A   0.02   18.53   1.41   1.25  

Stock  valuation  model  
The   model   rates   stocks   from   1   to   10,   with   10   being   the   best   using   a   system   of   advanced   mathematics   to   determine   a   stock's   expected   risk   and   return.   I   am   using   different   fundamental  and  technical  factors  in  order  to  rank  a  stock.   Intrinsic  value  of  the  stock   Investors  should  buy  stocks  selling  at  a  discount  to  their  intrinsic  value,  and  then  patiently   wait  for  the  fair  value  of  their  investments  to  be  realized.   VMW  Intrinsic  Value   EPS  ttm   EPS  Growth  (Assumption)   PE   DIVIDEND  PAYOUT   EXPECTED  STOCK  RETURN       in  2022   Forecasted  Stock  Price   Earnings  Per  Share  after  the  10th  year         TOTAL  DIVIDENDS     0.00    

 

1.81   1.13   45.67   0%   1.074  

         

275.68   6.04  

   

Year   2013   2014   2015   2016   2017   2018   2019   2020   2021   2022   TOTAL   EPS  

EPS   2.04   2.30   2.60   2.93   3.31   3.73   4.21   4.74   5.35   6.04   37.24  

Forecasted  Stock  Price  in   2022+DIVIDENDS  

275.68    

Net  Present  Value   134.76     stock  trades  38%  below  its   VMW’s  intrinsic  value  is  $134.76  the  current  price  is  $83.06,  the   fair  value.   The  Sensitivity  analysis  of  the  stock  varying  the  growth  rate  of  the  EPS  are  presented  in  the   table  below.     EPS  Growth   (Assumption)   Value   10%   104.81   11%   114.73   12%   125.5   12.80%   134.76   13%   137.16   14%   149.8   15%   163.47     Based  on  the  prospects  of  the  company  the  valuation  range  is  from  $104.81  to  $163.47.   Financials   The  financial  health  of  the  company  the  higher  the  better,  we  evaluate  all  the  financial  ratios   of  the  company.     Sentiment   Investor’s  sentiment  for  the  stock.   Analyst  ratings   The  model  assigns  a  value  according  to  analyst’s  recommendation  for  the  stock.   Analyst  rating  on  Reuters.com  is  7  Buy,  15  Outperform,  20  Hold,  2  Underperform,  and  1  Sell.   Earnings  Consistency   We   are   searching   for   EPS   numbers   that   are   better   than   the   previous   year's.   One   dip   is   allowed,  but  the  following  year's  earnings  should  be  higher  than  the  previous  year.  VMW’s   annual   EPS   for   the   last   5   years   were   0.73,   0.49,   0.84,   1.68,   and   1.72   this   type   of   earnings   action  is  favorable.     Total  Debt/Equity   The  company  must  have  a  low  Debt/Equity  ratio,  which  indicates  a  strong  balance  sheet.  The   Debt/Equity   ratio   should   not   be   greater   than   20%   or   should   be   less   than   the   average   Debt/Equity  for  its  industry  

VMW’s  Total  Debt/Equity  of  7.31  is  well  below  the  required  maximum,  furthermore  it  is  well   below  the  industry  average  of  22.47.         EPS  This  Quarter  VS  Same  Quarter  Last  Year   The   EPS   growth   for   this   quarter   relative   to   the   same   quarter   a   year   earlier   is   above   the   minimum   15%   that   this   model   likes   to   see   for   a   "good"   growth   company.   Stocks   with   improving  earnings  are  worthy  of  your  extra  attention.   VMW’s   EPS   growth   for   this   quarter   relative   to   the   same   quarter   a   year   earlier   is   27.30   %,   above  our  target.   Annual  Earnings  Growth   This  stock  valuation  model  looks  for  annual  earnings  growth  above  12%,  but  prefers  higher   than  20%.     VMW’s   annual   earnings   growth   rate   over   the   past   five   years   is   23.12%,   above   the   target   growth  rate.     Current  Price  Level   Investors  should  keep  an  eye  open  for  stocks  that  are  trading  within  10%  of  their  52-­‐week   highs,  as  it  is  likely  to  continue  in  its  upward  trend.   VMW's  52  week  high  is  $103.02  current  price  is  $83.06,  is  19.4%  below  the  52  week  high.     P/E  Ratio   The   Price/Earnings   (P/E)   ratio,   based   on   the   greater   of   the   current   PE   or   the   PE   using   average  earnings  over  the  last  3  fiscal  years,  must  be  "moderate",  which  in  this  model  states   is  not  greater  than  15.  Stocks  with  moderate  P/Es  are  more  defensive  by  nature.     The  company  has  a  P/E  ratio  of  45.67  the  average  industry  P/E  ratio  is  18.53  and  is  above  the   S&P  500  P/E  ratio  of  18.59.     Insider  Ownership   When   there   is   strong   insider   ownership   which   we   define   as   8%   or   more,   management   is   more   likely   to   act   in   the   best   interest   of   the   company,   as   their   interests   are   right   in   line   with   that  of  the  shareholders.     Insiders   own   34.92%   of   VMW   stock.   Management's   representation   is   large   enough.   This   does   satisfy   our   minimum   requirement;   companies   that   pass   this   test   are   more   attractive   to   our  valuation  model.   Technical  Analysis  

The   model   is   using   several   technical   indicators   (MACD,   RSI,   MFI,   OBV,   position   Indicators)   to   forecast  the  trend  of  the  stock  for  6  and  12  months,  and  assign  a  value.     VMW   is   trading   in   the   range   of   $65.02   -­‐   $84.77   in   the   past   30   days.   The   stock   has   been   showing  support  around  $72.40  and  resistance  in  the  $83  range.  The  stock  is  trading  above   the   50-­‐Day   Moving   Average   and   above   200-­‐Day   Moving   Average.   RSI(14):   73.66.   From   the   graph   on   page   1   it   can   be   seen   that   the   stock   has   opened   the   trading   session   on   July   24   above  a  very  important  resistance  level  of  $80,  which  is  also  a  very  important  psychological   level.   The   20-­‐Day   SMA   line   has   also   crossed   up   the   50-­‐Day   SMA   line   and   it   is   heading   upward,  which  is  also  true  for  the  MACD  signal  line.  Our  indicators  give  a  positive  view  on   VMW.     VMware,  Inc.   COMPANY:  

VMW  
10                           6   6   6   8   10   9   9   3   2   9   6   84   7.64   BUY  

 f  the  stock   Intrinsic  value  o
Financials   Sentiment   Analyst  ratings   Earnings  Consistency   Total  Debt/Equity   Quarterly  EPS  change   Annual  Earnings  Growth   Current  Price  Level   P/E  Ratio   Insider  Ownership   Technical  Analysis  

SCORE   RECOMMENDATION:      

   

       

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