Why Wells Fargo Just Downgraded EMC

Wells Fargo downgraded EMC Corporation EMC Wednesday from Outperform to Market Perform and lowered its valuation range from $31-$34 to $26-$28.

Analysts led by Maynard Um made the rating change following a meeting with management and thought the stock had "limited downside risk" but would likely remain range-bound.

Um noted that over the long-term it appeared that EMC's "strategy is the right one and will eventually drive it to be a scale competitor in the market," however, in the short-term there were few positive catalysts, at least until 2016.

The company's Board also made it clear that it was "unlikely to favor a [VMware, Inc. VMW] spin" and that management was not in a rush to buy the remaining shares in VMW, according to Um.

Um lowered FCF to be in line with new guidance of $4.3 billion, which implied a FCF to net income ratio of 1.1x versus the historical 1.3-1.4x ratio. EMC reiterated its 2015 revenue and EPS guidance of $26.1 billion and $1.98, respectively.

The analysts saw "some risk that EMC's 2015 guide may have to be revised downward due to currency," although hedging was expected to help.

Over the longer-term, 2016 EPS was estimated at $2.18 with and expected benefit of approximately $0.12 through earnings acceleration. Strategic investments were expected to be low-teens dilutive in 2015 and break-even in 2016, Um said.

The analysts indicated that $0.10 of the $2.18 estimate implied "the core businesses incrementally drive $0.03 in EPS with the remaining $0.07 from share buybacks."

Um cited key risks as "the macro economy and the potential corresponding impact to IT Spend, increasing competition from moves into new market adjacencies, as well as VMware volatility."

EMC Corporation recently traded at $26.00, down 3.53 percent.