A Big Thumbs-Up for Emulex

 | Nov 21, 2012 | 11:00 AM EST  | Comments
  • Comment
  • Print Print
  • Print
Stock quotes in this article:

elx

,

brcd

,

mrvl

According to a Form 4 filing with the SEC earlier this week, the hedge funds run by billionaire Paul Singer have upped their stakes in the tech company Emulex (ELX). Singer serves as CEO of Elliott Management, which oversees the hedge funds Elliott Associates and Elliott International. He founded Elliott in 1977 with $1.3 million from family and friends.

Elliott Associates primarily operates as an activist investor, taking significant stakes in companies in order to effect change and unlock shareholder value. Now it appears Elliott sees an opportunity to unlock value in Emulex: It owns 6.07 million shares of the company, according to the Form 4, while Elliott Associates owns 3.27 million shares. That makes for a total of 9.34 million shares, an increase of more than 50% from the funds' position in early October, and just over 10% of Emulex's shares outstanding.

Emulex is currently trading relatively flat for the year, having risen more than 50% during the first quarter. A slowing global economy has been the biggest headwind for the company, with stock declines coming mainly on reduced information-technology budgets among corporations and governments. The two behemoths of the semiconductor industry include Intel (INTC) -- one of billionaire Ken Fisher's seven high-dividend picks -- and IBM (IBM). Both of these also seen slowing enterprise demand.

Despite a nearly-50% decline in Emulex's second-largest business, storage products, last quarter the company still managed to grow revenue 1% from the prior year. It also posted earnings per share above consensus -- $0.19, compared with the $0.15 estimates. 

Given that various products within this division are near the end of their lifecycles, the company is now considered to be in turnaround mode. EPS growth over the last five years has averaged at negative 5%, but forward-looking earnings estimates expect growth of at least 5% a year.

We see the backing of Elliott's as a positive -- one that ensures management will maintain a high ability to navigate an ever-changing tech industry. Compared with other tech competitors, Emulex's forward price-to-earnings ratio is well below the industry average at 8x, which suggests the market is over-discounting Emulex's ability to ramp up earnings next year.

Elliott's share purchases here came as it was selling off shares of one of Emulex's competitors, Brocade (BRCD). That latter firm looks to grow in the data-storage market, including increases via the adoption of cloud computing. At 18x earnings, Brocade shares may have gotten too rich for Elliott -- after all, Cisco (CSCO) and Extreme Networks (EXTR) trade at a 12x multiple.

Another major competitor is Marvell (MRVL), which could likewise be worth a look. The stock, one of billionaire David Einhorn's latest stock picks, trades at 13x trailing earnings and a mere 11x forward earnings. The shares appear to have some over-discounted growth prospects, as well, trading at a P/E to growth (PEG) ratio of 1.2.

We believe Elliott's strong commitment to Emulex, now at more than 10% of the tech company's shares, is a positive. We are also impressed with Emulex's ability to effectively navigate its rapidly declining storage products division. It is definitely a stock to consider for your portfolio.

Columnist Conversations

Lockheed Martin is fading into the close. The stock opened the session with a gap higher open after rep...
It's hard to argue with the price action or the momentum indicators, but volume, as reflected on the graph at ...
Time resistance to the current rally comes in between 4/22-24. Good reason to trail up stops on any longs! ...
Market continues to power higher going into the last hour of trading. Looking forward to earnings after the b...

BEST IDEAS

REAL MONEY'S BEST IDEAS

Columnist Tweets

BROKERAGE PARTNERS

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by Interactive Data Managed Solutions.


TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

IDC calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.