EMC-Lenovo Deal Troubles HP Investors

EMC Corp.EMC, the biggest maker of data storage devices, and Lenovo Group, the world's second-biggest personal-computer maker, announced a major partnership Wednesday intended to help boost sales of storage equipment and servers that run corporate networks. That could may be bad news for corporate IT players such as Cisco Systems CSCO, IBM IBM, Hewlett-Packard HPQ, Oracle ORCL and Dell DELL. As part of the deal, Lenovo will resell machines made by EMC, helping the latter expand its presence in China, the world's second-largest economy, and ultimately other developing, high-growth markets. The companies are also forming a joint venture that will help them sell storage equipment to small and mid-sized businesses. For the current fiscal year,the partnership will not be material to either company's earnings, said the the two in a statement. The agreement replaces a partnership EMC had with Dell. That partnership was terminated last year after Dell became a competitor by entering the storage market. The news appeared to be particularly worrisome for Hewlett-Packard investors. Its stock was down more than 3 percent in afternoon trading, one of worst performers on the Dow, and reached a new multiyear low of $17.61. Shares of Cisco Systems, Dell and IBM were also down fractionally in the afternoon. Dell was trading near its 52-week low. After starting the trading session higher, EMC pulled back and ended the day slightly lower. The company has a market capitalization of almost $55 billion. Its price-to-earnings (P/E) ratio is less than the industry average, but so is its operating margin. The long-term earnings per share (EPS) growth forecast is about 14 percent, and the company's return on equity is higher than that of Hewlett-Packard. Before news of this deal, 35 out of 37 analysts polled by Thomson/First Call recommended buying EMC shares. Their mean price target, where they expect the stock to go, was about 17 percent higher than the current share price. That share price is up about 20 percent year to date, but still in the middle of its 52-week range of $19.84 to $30.00. Year-to-date, EMC has outperformed the broader markets and the companies mentioned above. ETFs holding EMC include Technology Select Sector SPDR XLK, PowerShares Dynamic Large Cap Growth PWB and iShares S&P 100 Index OEF. All three of these are more than 12 percent higher than they were at the beginning of the year. Lenovo has a market cap of about $59 billion and is headquartered in Hong Kong. Its long-term EPS growth forecast is more than 26 percent, and its P/E and PEG ratios are less than the industry average. Exchange traded funds holding Lenovo include Global X NASDAQ China Technology ETF QQQC and Guggenheim China Technology CQQQ.