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A Complete Benjamin Graham Analysis for Microsoft Corp.
Posted by: SerenityStocks (IP Logged)
Date: June 20, 2013 04:25PM
Benjamin Graham was Warren Buffett's professor and mentor at Columbia Business School. Buffett even named his son, Howard Graham Buffett, after Graham. In the preface to Graham's book,"The Intelligent Investor," Buffett calls it "by far the best book about investing ever written."
Serenity's Benjamin Graham Screener applies the 16 financial criteria given by Graham to all 4,700 NYSE and Nasdaq stocks to find defensive, enterprising and NCAV-grade Graham stocks. Today, we will do a complete Graham analysis for Microsoft (MSFT) and see what grade and price Graham would have recommended for it.
Microsoft Corporation is an American multinational software corporation headquartered in Redmond, Wa., that develops, manufactures, licenses and supports a wide range of products and services related to computing. The company was founded by Bill Gates and Paul Allen on April 4, 1975. Microsoft is the world's largest software maker measured by revenues.
1. A Defensive Analysis:
The first grade of stocks recommended by Graham are called defensive stocks. The criteria that Graham specified for identifying defensive stocks are as follows:
Quote:Graham's recommended price for defensive stocks, popularly known as the Graham number, can be calculated from criteria No. 6 and No. 7 as:
The publicly available financial figures for Microsoft are as follows:
Based on the above figures, we get the following results for each of Graham's Defensive criteria (anything above 100% is a PASS):
The Graham number works out to $16.09 for Microsoft. Unfortunately, Microsoft misses the dividend record requirement for defensive stocks and so this is not Graham's recommended price for Microsoft.
Let's now take a look at the other grade calculations given by Graham and see if Microsoft meets them.
2. An Enterprising Analysis:
If a stock failed to meet the criteria for defensive investment, Graham recommended the following criteria for enterprising investment.
Quote:This second set of criteria gives us a maximum price for a stock meeting Enterprising conditions as - the lower of 120% net tangible assets (book value), or 10 times current earnings. Microsoft does meet all the Enterprising criteria (except for the price). So Graham's recommended price for Microsoft works out to $7.12 per share.
Finally, let's take a quick look at the criteria that Graham recommended for NCAV, net-net or Bargain stocks, and how Microsoft fares against them.
3. An NCAV or Net-Net Analysis:
If a stock met neither Defensive nor Enterprising requirements, Graham recommended the final set of criteria.
Quote:These criteria give us what are called NCAV stocks - stocks selling for less than the value of their cash worth alone, and with positive earnings in the last one year.
These are also the most well-known of Graham's stocks, and the source of the popular misconception that Graham only recommended cheap stocks. These were, in fact, the last grade of stocks that Graham recommended.
Microsoft's NCAV price works out to $3.60 and the company has not reported net losses for the last 12 months. But since Microsoft meets all the Enterprising criteria at a higher price, Graham's recommended price for Microsoft remains its Enterprising price.
Microsoft's current price of $34.98 works out to a P/E of 18 and a P/B (tangibles) of 5.89. Since Microsoft does not meet Graham's defensive criteria, but meets the enterprising and NCAV criteria, Graham's recommended price for Microsoft is the enterprising price of $7.12 per share.
However, these results are based on a strict inflation-adjusted Graham analysis. Using more customized strategies, such as those in Tweaking Benjamin Graham's Stock Selection Criteria, would yield higher recommended prices for Microsoft such as a Serenity Number of $11.74, or even the Graham Number of $16.09 itself, if one were willing to overlook the partially met dividend criterion.
Lastly, this analysis should not be construed as a recommendation to short sell Microsoft. Graham never believed in predicting a stock's future price. As far as Graham's principles are concerned, Microsoft may remain at its current or even higher levels indefinitely. Graham simply recommended the prices at which stocks should be bought to avoid losses, and to consistently make profits.
Graham's elaborate criteria, when applied conscientiously to financial data, highlight any discrepancies between stock prices and a company's underlying numbers. Such objective statistical data helps in making informed investment decisions, minimizing losses and identifying unique investment opportunities.
Disclaimer: The results were arrived at by automated quantitative analysis and were not verified manually. Verify the validity of the data used - most importantly, for any recent stock splits - before making an investment decision.
Guru Discussed: Bill Gates: Current Portfolio, Stock Picks
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