“The stock market is a no called strike game. You don’t have to swing at everything – you can wait for your pitch.” – Warren Buffett
If I were you, I would get ready to swing. The reason is because Microsoft (MSFT) is coming across the plate, and it’s the perfect pitch to knock out of the park. That doesn’t mean much without some context, so let me set the story (with respect to Arnold Van Den Berg of Century Management and Whitney Tilson of T2, the latter having been all over MSFT through the low 20’s). Microsoft is the $241 billion company behind Windows (with a 92% market share) and web browser Internet Explorer (with 63% market share), among many other successful ventures. Over the past five years (more than half of which was spent in a global recession), revenues, cash flow, and earnings are up 14%, 14%, and 12% (respectively) per annum. For quarter end September 30th, 2010, revenues increased 13% year over year, net income increased 19%, and operating cash flow increased 34% (adjusted for the deferral of Windows 7 revenue). On top of stellar business results, the company holds a fortress balance sheet (AAA rated), with cash and equivalents of $44.173 billion compared to total debt of $10.665 billion. After accounting for the excess cash position, MSFT is trading at 11x trailing twelve months earnings (which ended June 30th, 2010, and featured the quarter which was handily beat by Q1 2011 results. As noted by Arnold Van Den Berg in his Nov. 2010 newsletter, MSFT has had an average P/E of 18.14 over the past 5 years, nearly 65% higher than the current ratio.
After pension funds took a beating through a second big pullback in less than ten years, they decided it was time to call it quits on the stock market for a while, cutting their exposure to equities from a peak of nearly 70% in the mid-2000’s to roughly 45% as of July 2010. Assuming they fled to safety (only makes sense), there is a good chance they ended up in AAA rated corporate debt, i.e. Microsoft bonds. Between the choice of the company described above, which also pays a 2.27% dividend (based on current price) and has bought back $60 billion worth of stock over the last five years, investors have instead chosen to buy 3,5,10, and 30 year MSFT bonds, which pay 25, 38, 52, and 82 basis points more than their respective treasuries; on the 5 year, you would be better off even if Microsoft stock didn’t budge a penny – sitting there and collecting your annual dividend (which is secured by that stockpile of cash) would provide a better return. One day, pension funds will have to change their plan if they want to ever meet funding goals, which means one thing: back to large caps like MSFT. Until then, investors can enjoy the fact that the company is borrowing money at 2-3%, which is being invested in a business with 81% gross margins; that’s what you call easy money.
In the case of MSFT, bond investors have turned to AAA corporate debt as a flight to safety; however, from a risk/reward perspective, this decision has been made with an emphasis on irrational fear, not as a logical conclusion based on the facts at hand. For rational investors with a long term view, now is the time to buy MSFT common.
If I were you, I would get ready to swing. The reason is because Microsoft (MSFT) is coming across the plate, and it’s the perfect pitch to knock out of the park. That doesn’t mean much without some context, so let me set the story (with respect to Arnold Van Den Berg of Century Management and Whitney Tilson of T2, the latter having been all over MSFT through the low 20’s). Microsoft is the $241 billion company behind Windows (with a 92% market share) and web browser Internet Explorer (with 63% market share), among many other successful ventures. Over the past five years (more than half of which was spent in a global recession), revenues, cash flow, and earnings are up 14%, 14%, and 12% (respectively) per annum. For quarter end September 30th, 2010, revenues increased 13% year over year, net income increased 19%, and operating cash flow increased 34% (adjusted for the deferral of Windows 7 revenue). On top of stellar business results, the company holds a fortress balance sheet (AAA rated), with cash and equivalents of $44.173 billion compared to total debt of $10.665 billion. After accounting for the excess cash position, MSFT is trading at 11x trailing twelve months earnings (which ended June 30th, 2010, and featured the quarter which was handily beat by Q1 2011 results. As noted by Arnold Van Den Berg in his Nov. 2010 newsletter, MSFT has had an average P/E of 18.14 over the past 5 years, nearly 65% higher than the current ratio.
After pension funds took a beating through a second big pullback in less than ten years, they decided it was time to call it quits on the stock market for a while, cutting their exposure to equities from a peak of nearly 70% in the mid-2000’s to roughly 45% as of July 2010. Assuming they fled to safety (only makes sense), there is a good chance they ended up in AAA rated corporate debt, i.e. Microsoft bonds. Between the choice of the company described above, which also pays a 2.27% dividend (based on current price) and has bought back $60 billion worth of stock over the last five years, investors have instead chosen to buy 3,5,10, and 30 year MSFT bonds, which pay 25, 38, 52, and 82 basis points more than their respective treasuries; on the 5 year, you would be better off even if Microsoft stock didn’t budge a penny – sitting there and collecting your annual dividend (which is secured by that stockpile of cash) would provide a better return. One day, pension funds will have to change their plan if they want to ever meet funding goals, which means one thing: back to large caps like MSFT. Until then, investors can enjoy the fact that the company is borrowing money at 2-3%, which is being invested in a business with 81% gross margins; that’s what you call easy money.
In the case of MSFT, bond investors have turned to AAA corporate debt as a flight to safety; however, from a risk/reward perspective, this decision has been made with an emphasis on irrational fear, not as a logical conclusion based on the facts at hand. For rational investors with a long term view, now is the time to buy MSFT common.
