I saw a Reuters article today about the hedge funds adding Microsoft in Q2. Quite a list are finding this mammoth company too inexpensive to ignore. Buyers include David Einhorn (Greenlight), Dinakar Singh (TPGAxon), John Griffin (Blueridge), Whitney Tilson (T2 Partners) and Thomas Claugus (GMT Capital).
I wrote in late July about Microsoft being too cheap to ignore:
http://www.gurufocus.com/news.php?id=101063
All that has changed since then is the share price. At the time of my previous article shares were $26 and today they are $23.50.
With this recent share price decrease Microsoft is trading at about 10x the next 12 months earnings, and if you back out the $37 billion of cash on the balance sheet it is more like 8x. I can hardly believe that Microsoft which has its systems running more than 90% of the world’s personal computers can be had for an earnings yield of 12%.
And this with most analysts actually forecasting rising profits in the year ahead. An 8x multiple might be appropriate for a stagnant business. Not for a company with a Rock of Gibraltar balance sheet and a dominant business position.
Reuters quoted Tilson:
"That's insanely cheap for a company of this caliber and market position," said Whitney Tilson, managing partner of T2 Partners LLC and the Tilson Mutual Funds, who bought Microsoft shares in the second quarter.
Here is a link to Tilson’s case for investing in Microsoft:
http://www.gurufocus.com/news.php?id=100068
I think the investment case is pretty obvious. What I want to talk about is all that cash.
Unused cash on the balance sheet $37 billion
Cash coming in the door every year $20 billion
Such a high class problem to have. Too much cash to deploy in an intelligent manner. Currently Microsoft is paying out about $4 billion in dividends and another $10 billion or so in share repurchases. But even that doesn’t put a dent in the huge cash balance on the balance sheet which continues to pile up as dividend payments and share repurchases are considerably less than the cash coming in.
I see in the press all of the time how Microsoft needs to take on Apple or Google. But why can’t they just stick to their dominant business and look outside the technology industry to earn high returns on their cash hoard ? We all know that Gates and Buffett are good pals. Gates is even on the Board of Berkshire Hathaway so he understands well the idea of milking a cash cow for better opportunities elsewhere. We also know that Gates has very intelligent people managing the money for the Bill and Melinda Gates Foundation and they have expertise across quite a few industries. In fact they hit a homerun investing in railroads before Buffett and Munger caught on to the idea. Here is the last quarterly filing for the foundation:
http://www.sec.gov/Archives/edgar/data/1166559/000104746910007567/a2199827z13f-hr.txt
So my suggestion is that Microsoft should move to a Berkshire Hathaway business model, bring in a master capital allocator and invest that cash hoard at the highest rate of return possible. I’d much prefer that to having them trying to force their way into other business areas where they have no competitive advantage, or have that huge lump of cash just sit, grow and earn next to nothing for the next 10 years.
Wouldn’t it be exciting to wake up tomorrow and find out that Bruce Berkowitz was going to be in charge of maximizing the return on Microsoft’s cash balance ? Who wouldn’t bet that shareholder value would be higher ten years from now if that actually happened than it will be with the current model which will entail more of the same and likely some very expensive technology related acquisitions ?
I don't own MSFT yet, but I'm getting close. A few more points off the share price and I won't be able to resist.
