In one of our Fundamental analyses, we calculated a fair value of $48.91 for Microsoft (MSFT, Financial).
In this article, we will take a different approach to value MSFT.
We will start with a history of earnings per share and the evolution of the share price:
We can see that the earnings per share have been in a strong uptrend over the last 21 years.
If we calculate the earnings growth year over year, and assume that price would have risen just as much as earnings per share each year (an annual compound rate of 20.2% for Basic EPS and 21.25% for Diluted EPS), price should have risen from $0.94 (the closing price of the last trading day of 1990) to $44.81 at the moment.
As MSFT is currently trading at $25.10, we can see that the share price has lagged earnings growth. We can also clearly see the effect of the Internet bubble in 2000, when the share price rose too much compared to EPS. When bubbles burst, it takes time, a lot of time before the uptrend can resume.
When we measure the over- and undervaluation based on earnings per share growth, we can clearly see that MSFT was severely OVERVALUED in 2000:
Based on this model, MSFT would now be 43.98% undervalued based on basic EPS growth, and 53.32% undervalued based on diluted EPS growth. Based on this model, MSFT should be trading at $44.81 and $53.77 respectively, which is in line with the fair value we calculated in this report.
Over the last 21-22 years, MSFT has traded at an average price-to-basic earnings ratio of 25.45 and an average price-to-diluted earnings Ratio of 26.84.
If we multiply those averages with the earnings per share each year, we get a price target that corrects for sky-high P/E levels of 2000, but also the very low P/E ratios of the last four years.
We then calculate the over- and under-valuation of the actual share price in one year to the estimated share price based on the average P/E ratio. The result is the following chart:
Based on this model that uses historical averages, MSFT is 67.31% undervalued, and should be trading at $76.78.
Conclusion: Although this model is not waterproof, it is interesting to put MSFT’s recent share price in historical perspective. Based on this analysis and our fair value calculations, MSFT is severely undervalued.
To obtain the Excel sheet used for calculations and graphs, please click here: http://profitimes.com/wp-content/uploads/2011/08/MSFT-undervaluation.xlsx (data obtained from Microsoft’s website and Zacks Research Wizard).
For more analyses and articles, please visit www.profitimes.com.
In this article, we will take a different approach to value MSFT.
We will start with a history of earnings per share and the evolution of the share price:
We can see that the earnings per share have been in a strong uptrend over the last 21 years.
If we calculate the earnings growth year over year, and assume that price would have risen just as much as earnings per share each year (an annual compound rate of 20.2% for Basic EPS and 21.25% for Diluted EPS), price should have risen from $0.94 (the closing price of the last trading day of 1990) to $44.81 at the moment.
As MSFT is currently trading at $25.10, we can see that the share price has lagged earnings growth. We can also clearly see the effect of the Internet bubble in 2000, when the share price rose too much compared to EPS. When bubbles burst, it takes time, a lot of time before the uptrend can resume.
When we measure the over- and undervaluation based on earnings per share growth, we can clearly see that MSFT was severely OVERVALUED in 2000:
Based on this model, MSFT would now be 43.98% undervalued based on basic EPS growth, and 53.32% undervalued based on diluted EPS growth. Based on this model, MSFT should be trading at $44.81 and $53.77 respectively, which is in line with the fair value we calculated in this report.
Over the last 21-22 years, MSFT has traded at an average price-to-basic earnings ratio of 25.45 and an average price-to-diluted earnings Ratio of 26.84.
If we multiply those averages with the earnings per share each year, we get a price target that corrects for sky-high P/E levels of 2000, but also the very low P/E ratios of the last four years.
We then calculate the over- and under-valuation of the actual share price in one year to the estimated share price based on the average P/E ratio. The result is the following chart:
Based on this model that uses historical averages, MSFT is 67.31% undervalued, and should be trading at $76.78.
Conclusion: Although this model is not waterproof, it is interesting to put MSFT’s recent share price in historical perspective. Based on this analysis and our fair value calculations, MSFT is severely undervalued.
To obtain the Excel sheet used for calculations and graphs, please click here: http://profitimes.com/wp-content/uploads/2011/08/MSFT-undervaluation.xlsx (data obtained from Microsoft’s website and Zacks Research Wizard).
For more analyses and articles, please visit www.profitimes.com.
