Pay Off This Wolf Pelt

With a market capitalization of $47 billion, EMC Corp's valuation less their 90% stake in VMware Inc. is, with today's market cap of $39 billion, only $12 billion. With a trailing-twelve-month EPS of $0.61, EMC's current share price prices the non-VMware portion of their business at just 9.6 times earnings (and only 8.3 times earnings using an estimated 2007 EPS of $0.70 and 7.1 times earnings using an $0.82 2008 EPS estimate). Compare that to similar-growth companies in the same industries and it is, well, quite low.

Perhaps EMC is undervalued, incorporating too small a valuation of VMware into its stock price. Maybe VMware is overvalued, what with a trailing-twelve-month P/E of 281.45 and all. Possibly both. Whatever the case, the spread ought to converge.

Relative value play: Short VMW, long EMC.