Last July, I told you about a great way to get two stocks for the price of one through corporate spin-offs.
You may recall that this is a process in which a parent company separates a business unit into a stand-alone outfit and then issues shares in the new operation to the public.
The great thing for investors is that by owning stock in the parent company they generally get shares in the spin-off automatically as special dividends, often tax-free.
At the time, I mentioned that a spin-off from computer storage leader EMC Corp. (NYSE: EMC) should do particularly well.
The spin-off company, Pivotal Inc., marks its one-year anniversary this month as it continues to gain traction in the Internet realm.
And that means EMC is getting traction, too.
Lots of traction, in fact.
Let me show you why…
Already a Leader
You’d be hard-pressed to find a savvier company than the Hopkinton, Mass.-based EMC. And let me tell you right now: There’s more to this story than just the Pivotal spin-off.
Over the past decade or so, EMC has gobbled up more than 70 high-tech companies in a mergers-and-acquisition spree that saw the firm spend about $17 billion.
That’s more than the company spent on research and development during that same period.
EMC ranks as a global leader in data storage products that are integral to Cloud-Computing technology, also known as “The Cloud.” EMC also makes money selling services, including storage and data backup.
Truth be told, EMC makes some of the very best hardware for mass-data storage. And it’s actually gaining market share, a tough feat for a sector leader that’s usually the target of all the other sector upstarts.
EMC, it seems, likes to push back.
A new report by stock-researcher Trefis.com says EMC has managed to hold its lead for at least a decade, an amazing feat when you consider the avalanche of hungry young firms that have launched in the period.
According to IDC estimates, EMC’s share of the storage hardware segment is over 30%. That’s about two-and-a-half times that of its nearest competitor, NetApp Inc. (Nasdaq: NTAP)
And EMC has excellent financials. Trading at $27 a share, it has a market cap of nearly $55 billion and sells for less than 13 times forward earnings.
It has operating margins of 19%, and a 13% return on stockholders’ equity.
EMC recently increased its quarterly earnings by more than 17% and last year brought in more than $4.6 billion in free cash flow (FCF).
Thus, as I see it, EMC ranks as a great foundational play. It has the power to remain a market leader – and high earner – for years to come.
EMC also has deep expertise in high-margin M&As, which will help it further increase its market reach.
But unlike the rest of its high-tech brethren, EMC has an additional potential catalyst that we believe will ignite the company’s shares.
We’re talking about the Pivotal spin-off.
When Breaking Up is Good to Do
Spin-offs are a field that I’ve been following for the last few years. In fact, if you choose the right ones, you’re looking at some easy-money profits.
Research backs me up. Several institutional investors and major universities have found that shareholders often score big gains. For instance, a study by Lehman Bros. found that spin-offs typically outperform the market in their first two years by as much as 40%.
Then there’s a report from two professors at Penn State University. They looked at 30 years of market data covering 174 spin-offs.
Their finding: In the first three years of operations, these new independent companies showed price appreciations of 76%, beating the Standard & Poor‘s 500 Index by 31%.
Bear in mind: Three decades covers a lot of data – traversing both bull and bear markets.
And that means these spin-offs are great long-term plays.
But with the EMC-Pivotal spin-off, we have a lot more going on than just the market for these kinds of arrangements.
Pivotal is already a fast-mover in Cloud Computing, one of the biggest global tech trends out there today. The Cloud is benefitting from the fact that companies want to keep a lid on their computing costs by outsourcing data centers to third-party vendors.
With these factors in mind, Forrester Research predicts the market for Cloud Computing will grow to $241 billion by the end of this decade. That’s roughly a 487% increase from the base year of 2011, when the Cloud had total sales of about $41 billion.
Moreover, Pivotal is also deeply rooted in another major tech trend: Big Data. This is a field where computers crunch through massive amounts of unstructured data to look for things like online fraud or to make strategic predictions about market growth.
Big Data is the “answer” to the question: How do we make sense out of the overwhelming amount of data we’re generating in the Information Age?
Analysts note that 90% of the data we work with was just created in the last two years alone. Forecasts call for this sector to grow tenfold over a five-year period, growing to roughly $50 billion by 2016.
Pivotal recently received extensive media attention as the new player to watch. Just last week, The New York Times profiled the company’s “Big Data Suite,” a bundle of new big-data products with simplified pricing that fits Pivotal’s Cloud-style approach.
For its part, Pivotal has one main advantage I always look for in a tech investment – great leadership.
An Inside View
Consider that Pivotal CEO Paul Maritz formerly held several key positions at global software giant Microsoft Corp. (NasdaqGS: MSFT). In his 14 years at Microsoft, Maritz helped develop Windows 95 and Windows NT, a product often found in data centers.
In some ways, you could say Maritz was involved in the precursor to today’s Web-based Cloud: He helped make Internet Explorer the world’s dominant browser.
Not only that, but Maritz logged four years as CEO of VMware Inc. (NYSE: VMW). That’s a computer virtualization firm partnering with EMC on the Pivotal deal.
At a Southern California investment conference last month, Maritz described the thrust of Pivotal’s approach with two words: Open standards.
In other words, Pivotal’s Cloud platform and Big Data analytics engine are designed to run on any server in any environment.
That means clients don’t have to invest in, say, a Microsoft approach, and then find it hard to add applications developed by competitors. It’s all part of a strategy to create newer, faster ways for large companies to manage and analyze massive amounts of data.
Pivotal must really be onto something with its approach: Industrial giant General Electric Co. (NYSE: GE) invested $105 million in the company last year.
Then, again, if IBM execs saw the same business model we did, it’s no wonder they’re so bullish on Pivotal. Using the 2012 financials that were available as part of EMC’s statements, we can see that Pivotal had sales of $300 million.
But EMC execs say that they believe the new standalone unit can more than triple revenue to $1 billion in five years.
EMC has said it could take up to three years to take Pivotal public. But many analysts say it actually could happen by the end of this year while the market for IPOs remains strong.
The company said it will use a blueprint similar to VMware’s. That company was itself an earlier spin-off from EMC. VMware is publicly traded but EMC still owns nearly 80% of VMware.
The Pivotal spin-off gives investors a firm grip on two of the hottest trends in tech today – Big Data and the Cloud – all in one fell swoop.
And if the company were already public, the Big Money crowd up on Wall Street would be bidding Pivotal’s shares to the sky.
Instead, the pros seem to be willing to bide their time until the Pivotal IPO plays out.
We’re not so patient.
In fact, we want to give you a head start.
And you can get that head start by investing in EMC.
Think of it as a “secret” path to the hottest tech play in Silicon Valley.
See you later this week.
Editor‘s Note: Your feedback is very important. As always, I welcome your comments, questions and suggestions. Post a comment below … I look forward to hearing from you.