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McData: Doing Better than Its Parent?

Yesterday, EMC was able to survive its earnings announcement. But there is good reason: the company is a leader in a rapidly growing business. What's more, high-end storage is likely to see strong growth over the long-term.

The company reported that its third-quarter earnings rose 55 percent to $458.2 million or 20 cents a diluted share. Analysts were expecting 19 cents.

The stock did drop, but not much. The company dipped $4-15/16 to $90.

I think the performance of EMC can provide guidance on another company, McData . You see, McData is a recent spin-off of EMC.

McData develops storage area network (SAN) switches and software solutions for the high-end segment of the marketplace. In fact, it is likely that companies will start to migrate from SAN islands toward enterprise-wide SANs. In other words, companies will need the advanced switching technologies of McData.

Thus, expect McData to experience accelerated growth. For example, estimates show that the SAN hardware market is expected to grow from $450 million in 1999 to $7.5 billion by 2003.

About 70% of revenues of McData come from the EMC customer base. However, with the spin-off, McData can pursue an expanded customer base. And, McData will have more flexibility in promoting industry-wide standards.

In the spin-off, EMC retained 85% ownership in McData. As a result, McData has a relatively small float of 12.5 million shares. With the company's earnings report coming out on October 19 (after hours), there could be a pop. Already, the stock has been showing strength.

Although, keep in mind that EMC will likely distribute the remaining 85% of its holdings within the next three months or so. This will likely weaken the stock as more shares flood the market. But, I think in the near-term, McData may be a good momentum play, especially when Nasdaq rallies.