Brian Rogers explained his rationale for investing in Microsoft (MSFT, Financial) during the Barron's Roundtable. Rogers, a long time value investor, currently holds MSFT in his portfolio. However, it is only 1.4% of his total portfolio.
Nonetheless, Rogers is attracted by both the growth rate and valuation of MSFT.
"In our research meetings, we talk about companies that grow at 15% a year long term. They should have a sustainable competitive advantage because so few companies do that year in and year out. If I told you Microsoft had grown revenue at 11% and earnings at 16% compounded over the past 10 years, that would be better than all but probably 5% of the companies in the S&P 500."
Investors seem so fixated on hyper growth at companies like Apple (AAPL) that they have ignored the stellar operating performance of Microsoft over the last decade.
The hate for Microsoft and other tech stocks largely stems from the tech bubble where valuations were sky high.
"The stock was probably 40 times earnings 10 years ago and now is nine or 10 times earnings. It was one of those companies, like Intel (INTC, Financial), Walmart (WMT, Financial) and General Electric (GE, Financial) that sold for 35 to 45 times earnings in 2000. You have had 12 years of value compression. Microsoft, at $28, with roughly $6 a share in cash and a yield of almost 3%, earned $2.69 a share for the year ended last June. In the current fiscal year it could earn $2.70 to $2.80. The company is in the midst of a $40 billion stock-buyback program. Culturally, Microsoft is a little tired of being sneered at. You never want to criticize anybody for 16% compound earnings growth. They were hit hard for acquiring Skype. As a corporation, they don't get the respect they deserve. The stock sells for three multiple points less than some utility stocks."
Currently, investors are rushing into utility stocks due to deflationary fears. However, with a dividend yield of 2.7%, investors might be better served with shares of MSFT.
Rogers also noted that the Windows 8 product cycle which includes a new mobile operating system should increase the upside targets for Microsoft.
"A new Windows 8 product cycle is coming later this year. What is the downside risk? Maybe $2 or $3 a share. And what is the upside? If you put a 12 multiple on fiscal 2013 earnings per share, you theoretically could get a $35 stock sometime in the next year, with the dividend yield on top of that. They raised the dividend in the fall. Their pattern of capital return to shareholders is another catalyst. Will they continue to take the dividend up aggressively? Will they continue to buy back shares? Will Windows 8 be a success? There are all sorts of ways to win."
Clearly, MSFT is a company that has a number of upside catalysts with little downside risk other than overall market risk.
Nonetheless, Rogers is attracted by both the growth rate and valuation of MSFT.
"In our research meetings, we talk about companies that grow at 15% a year long term. They should have a sustainable competitive advantage because so few companies do that year in and year out. If I told you Microsoft had grown revenue at 11% and earnings at 16% compounded over the past 10 years, that would be better than all but probably 5% of the companies in the S&P 500."
Investors seem so fixated on hyper growth at companies like Apple (AAPL) that they have ignored the stellar operating performance of Microsoft over the last decade.
The hate for Microsoft and other tech stocks largely stems from the tech bubble where valuations were sky high.
"The stock was probably 40 times earnings 10 years ago and now is nine or 10 times earnings. It was one of those companies, like Intel (INTC, Financial), Walmart (WMT, Financial) and General Electric (GE, Financial) that sold for 35 to 45 times earnings in 2000. You have had 12 years of value compression. Microsoft, at $28, with roughly $6 a share in cash and a yield of almost 3%, earned $2.69 a share for the year ended last June. In the current fiscal year it could earn $2.70 to $2.80. The company is in the midst of a $40 billion stock-buyback program. Culturally, Microsoft is a little tired of being sneered at. You never want to criticize anybody for 16% compound earnings growth. They were hit hard for acquiring Skype. As a corporation, they don't get the respect they deserve. The stock sells for three multiple points less than some utility stocks."
Currently, investors are rushing into utility stocks due to deflationary fears. However, with a dividend yield of 2.7%, investors might be better served with shares of MSFT.
Rogers also noted that the Windows 8 product cycle which includes a new mobile operating system should increase the upside targets for Microsoft.
"A new Windows 8 product cycle is coming later this year. What is the downside risk? Maybe $2 or $3 a share. And what is the upside? If you put a 12 multiple on fiscal 2013 earnings per share, you theoretically could get a $35 stock sometime in the next year, with the dividend yield on top of that. They raised the dividend in the fall. Their pattern of capital return to shareholders is another catalyst. Will they continue to take the dividend up aggressively? Will they continue to buy back shares? Will Windows 8 be a success? There are all sorts of ways to win."
Clearly, MSFT is a company that has a number of upside catalysts with little downside risk other than overall market risk.
