VMware, Inc.

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:

VMware, Inc.

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