We are initiating coverage of EMC Corporation (EMC) with a Neutral rating and a $16 price target. Our rating is based on the following thesis:

EMC holds a leadership position in the storage hardware and software segment. The information storage business is EMC’s largest segment (78.0% of fiscal 2008 revenue).

The company has reasserted its market leadership in the important high-end storage product category with the recent launch of V-MAX, its new Symmetrix line. Moreover, the new V-MAX product could help EMC gain additional market share in the cloud computing space.

Successive acquisitions have helped EMC build a strong portfolio of products, which provides tough competition to large software vendors. The recent acquisition of Data Domain, a provider of storage solutions for backup and archive applications based on deduplication technology, will provide higher synergies beyond 2009 and position EMC as a leader in the enterprise storage and backup market. The acquisition is expected to be accretive to 2010 pro forma EPS.

With the strategic alliance with Cisco (CSCO) and VMware (VMW) (86.0% ownership) in data center and security, as well as enterprise segments, EMC will be able to drive new growth opportunities within large virtualized next-gen data centers.

Most recently, EMC was selected by Vodafone (VOD) as a preferred partner for storage and storage-related products in its European markets.

With good second-quarter results and a positive outlook for 2009, we believe it has further upside. The current earnings momentum, strong business execution, impressive free cash flow, favorable new product cycle (particularly V-MAX), stringent cost reduction efforts and the recent acquisition of Data Domain are other positives. As a technology leader in the storage category, EMC is well positioned to benefit from the long-term growth in the industry.

However, we believe that competition in storage is heating up, resulting in weaker pricing. EMC faces aggressive competition in the storage, networking and virtualization space from system vendors such as International Business Machines (IBM), NetApp (NTAP), Hewlett-Packard (HPQ) and Hitachi (HIT).

Also, higher restructuring costs may pressure margins. Further, acquisition-related integration risks remain.

Although corporate IT spending and demand are showing signs of stabilization, we expect a slow recovery. As a result, we continue to expect weak near-term results.

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