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Microsoft, Quality, Durable, High Yielding, liquidity and CHEAP!!!

February 16, 2013 | About:

Crafool

6 followers
It is completely bizarre that we see investors husbanding cash and holding Treasury bonds rather than investing in some of the best companies in the world. Imagine investing in assets that offer the investor a "negative real rate of return" rather than investing in a proven leader with rock solid finances growing sales and earnings, at a price that offers a compelling if not out right high yield and with liquidity?

Yes, the worldwide crisis in government leadership along with the ussual investor mistakes has created an opportunity in my opinion in the shares of Microsoft stock. Please allow me to use my cocktail napkin approach to share what I see in Microsoft, and please I welcome your comments.

What first draws my attention to Microsft is how most investors dislike it and its stock and love Apple and its stock. Note: I use Valueline stock reports for they give great data history on the companies they follow. I always remember what Seth Klarman points out regarding one of investors' greatest advantages is time horizon. Valueline preaches it and Wall Street scorns it. If you talk with investors they will tell you Microsoft and its stock basically "stink". The company's stock has done nothing in years. No, I would point out. It's stock "price" has done worse than nothing in the last 12-years. If you look back to Microsoft's "Golden Age" with investors it woulld be around the year 2000, when the stock was trading near $48 per share and today it is trading around $28 per share. Thus, the stock price has declined around 42% over the last 12-years!!! This is worse than nothing!!! Microsoft is to blame!!!

Really? Blame Microsoft for the performance of its stock price. Why? Is company performance and stock price directly correlated? I mean should the fact that the share price of Microsoft stock declining reflect that Microsft the company's performance has deteriorated over the last 12-years? Well lets look at three keys to stock price and coporate performance.

First, revenue or sales is the one number that can not be manipulated like earnings per share or EPS. In 2000, Microsofts revenue or sales per share was around $2.65. It's EPS was around $0.85 per share and it paid no dividend. Investors paid the handsome price of $48 per share for these sales, EPS and future growth potential. Thus, since the stock market is efficient the fact the share price today is close to $28, Microsoft must have disappointed investors because the stock price has decline over 42%!!!

Let's see about Microsoft's 2013 Valueline estimates to see how bad the company has done these last 12 or so years. Microsoft's estimated 2013 per share sales or revenues is around $9.85 (2000, around $2.65). So sales are UP and not down? Yes, Microsoft's sales are estimated to be up almost 300% in these last 12 or so years (Please check the numbers. I might be slightly off since I am doing this from memory, and why I call it table napkin analysis.). Clearly, Microsfot must be a dissapointment since the sales or revenue per share only went up 200 to 300%!!!

Let's see about EPS and again how it must have disappointed over the last 12 or so years. Microsoft's estimated EPS for 2013 is around $2.95 per share (2000, around $0.85). The EPS like the sales per share went UP and not down! The EPS increased by around 250% over the last 12 or so years. That is sooo disappointing. You know the EPS per share now exceeds the earnings per share in 2000. It isn't just that, but now the compsny pays a dividend of around $0.92 (2000, No dividend) which now exceeds thet total amount of the EPS (2000, $0.85) of the company back in 2000! The dividend yield is around 3.30% or 163% of the 10-year Treasury Bond. Of course the 10-year Treasury Bond yield is fixed and Valueline projects Microsoft's dividend for the next few years to increase by double digits!!

Now, when I buy a stock I look for 3 main risks to try and cover as best I can. The risks are balance sheet risk, EPS risk and price risk. (Please note: Cocktail napkin figures and you should verify for yourself).

1.) Balance sheet risk. Current Assets of around $80 Billion, Current Liabilities of around $30 Billion and Long-term debt of around $10 billion. Thus, Microsoft has current asset after all debt of around $40 biilion and given there is around 8 billion shares of common stock outstanding that means there is basically $5 out of the $28 share price in current assets!!! I would say that qualifies Microsoft as having a rock solid balance sheet and since the company needs $0.40 of the estimated 2013 EPS for Capital Spending that the mountain of current assets is likely to grow, and the level of growth only mitigated from Microsoft buying back stock and increasing the dividend to investors. So I place a check with as much confidence as I can reasonably have that this is good in my opinion/

2.) EPS Risk. I think one of the greatest tricks for simple analysis was provided to me by Mary Buffett. If the name sounds familiar it should be for she is Warren Buffett's ex-daughter in law and author of the book, Buffettology. Two quick and simple observations can tell you if you are looking at special company or just another commodity business. They are the trend in sales and EPS figures over the years and the Return on Equity. If the company has many years of increasing sales and EPS figures like Microsoft, which has done exactly that for the last 11 out of 12 years then you know they have something special. It means they have some special sauce that makes their product or service voluable enough to be able to increase pricing and the customers allow it. Passing along pricing increases is what truly differentiates the extraordinary business from the commodity business. No surprise that Microsoft is the 600 pound gorilla in the coporate, government and education IT segment. This segment is the least trendy and the largest. You know there is an expression among corporate Head of IT that goes like this, "You don't get fired for hiring IBM'. This speaks to the anti-trendy nature of business, government and education and solidifies Microsoft as a "platform" company that is ingrained into the infastructure and not likely to be removed for many years. Micrsoft new Surface Tablet, and new Windows 8 will obviously find its way into the corporate sector, but will serve most likely as the plateau for Apple's sales in the consumer side. Unfortunately, Apple is a trendy technology company and just as first mover advantage rewards as it has done for them, the lack of barriers to entry and not being a necessity will most likely show a pretty good erosion to the durability of their business. Now they might be able to come up with something new like Apple TV, but a businesss model based on constant Big Bang innovation is just too risky for me. Microsoft's return on equity is over 20% and though that might not seem supper great, It is anchored by the excess capital. If they had net debt5 like most company's the ROE would be far higher. I point out that Buffett thinks anything over 15% without debt is a great business. So check this off for Microsoft.

3.) Price Risk. Microsoft's stock price is just over its 52-week lows of around $26. The Enterprise value of the company is around $23 (Current Equity value minus net current assets) and with an estimated $2.95 EPS for 2013 that puts the Forward P/E of 7.8 on the E.V. and 9.5 on the current stock price. The earnings yield on the E.V. is 12.83% after tax and at an estiamted 20% tax rate at 15.39% versus a 10-year T-Bond's fixed yield of 2.02%. Oh, Valueline also think Microsoft's EPS will grow by over 10% for the next few years. So as far is price risk, I think when looking at MSFT's historical P/E ratios that it is cheap at current levels and when I think of it relative to bonds I think 15% looks better than 2%.

So if Microsoft doesn't stink, why did the share price do so poorly? Well, investors needed to understand that price paid dictates risk and future return regardless of asset and growth expectations. In 2000, investors put a 50 plus P/E on Microsoft. Simplisticly, that P/E gave Microsoft and earnings yield of around 2.0% and at that time the 10-year Treasury was around 7.5%. Guess which one outperformed the other for the last 12 plus years? Now, the shoe is on the other foot so to speak with the 10-year T-bond offering a 2% yield and because of investor discuss Microsoft is priced to yield not around 7.5% but around15%!!! So don't blame Microsoft for its stock price performance, but past investors blame yourself. Today, Microsoft's stock looks like it is trying to reward investorzs that want a company that is an undeniable leader, an essential company, solidly financed, growing, offers liquidity and is returning value to shareholders thru dividends and share buy backs.

Last word of advise, never hold any asset too dear or too jaded!!! They all get their time in the sun and it ussually has to come after they have sufferrred greatly.

Happy investing to all. Please do not rely on my work or anyone else's but your own work. I hope this serves only to get you to do work/research on Microsoft and form your own opinion!!! Comments appreciated!

Rating: 4.0/5 (9 votes)

Comments

vgm
Vgm - 1 year ago
"I always remember what Seth Klarman points out regarding one of investors' greatest advantages is time horizon."

Any thoughts on why Klarman just sold out his position in MSFT? What do you see as the main threats/risks to an investment in MSFT?
crafool
Crafool - 1 year ago
Vgm,

In my opinion, Seth Klarman sold his Microsoft Common Stock position valued at around $41.6 million, because he became even more "bullish" on Microsoft. The following is the link to the 2/13/2013 Baupost 13F filing with the SEC:

http://www.sec.gov/Archives/edgar/data/1061768/000114036113006404/form13.text

It appears that Seth used the original $41.6 million to buy Microsoft "Call" Options valued at $53.41 million. The new "Call" Options position represents an increase of over 28% in his Microsoft investment. The fact he leveraged the investment by using options versus the common leads me to believe that he sees BIG price appreciation potential. He is willing to focus on it rather and give up the nice dividend yield. Klarman's noted for high returns on his fund even while holding large cash positions. I guess he follows the Buffett/Munger approach of when you doyour research and see a good opportunity for a satisfactory investment result then "You buy a meaningful amount!".

As far as Microsoft's weaknesses, obviously they were late with getting out a tablet and allowed Apple a nice first mover position. A mistake but hardly going to kill them. I would say there is a lot of concern over "cloud computing", however as long as the President of the United States, Secretary of Defense, CIA and FBI warn about cyber attacks as being the next great threat to America and other free nation security I think coporations and individuals are going to still be doing computer the way they do it now rather than outsourcing to the internet. I mean Facebook just got hacked today!

I always remember what Buffett says "Give a good manager a great business and both will succeed, however put a great manager in a poor business and the business will win!". Microsoft's ingrained and entrenched position makes it a great company. Apple's first to market success in mobile makes it a good business but only time wil tell if Apple moves to "great" or "commodity". So far in their history they have been both, but Microsoft has always been great.

Happy investing to all.

vgm
Vgm - 1 year ago
Crafool,

Thanks for the full response.

You suggest Klarman "became even more "bullish" on Microsoft."

I don't buy that. The truth of the matter is that Klarman made MSFT a major equity holding in 2011, buying 12M shares at a cost of some $300M - and he's been unloading it ever since. I'd interpret that as him losing confidence in his thesis, just as he did with HPQ where he sold out at a substantial loss after a very short holding period. $50M is a drop in the ocean for Klarman.

I do agree MSFT qualifies as a "great company" and I think Mr Market is puting it (incorrectly) in the same bin as Dell and HPQ, thereby keeping price compressed. It's been encouraging to see Greenlight and First Pacific scooping it up of late and capitalising on Mr Market's myopia.

Thanks again for the stimulation. Good Luck!
crafool
Crafool - 1 year ago


Vgm,

Why would you not buy that Seth Klarman, the author of Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor and very successful hedge fund manager trained by Michael Price and Max Heine is more BULLISH on Microsoft?

What are the facts? Seth Klarman sells $41.6 million of Microsoft and turns around and purchases $53 million of dervatives on Microsoft in the form of 2,000,000 Call options.

For discussion lets disect this move without bias or opnion. Is holding options on a Company's stock riskier or less risky than holding the common stock outright? I believe that options give the investor the ability to "leverage" their investment dollars, however they pay a "premium" for this right which is an added cost and they assume a new degree of "time risk" since options can expire worthless at a set time. I beleive an investor of Klarman's level would most likely only change his risk profile if his thoughts regarding a particular opportunity had changed toward his certainty toward the possiblity of the success of the investment. Why else would one assume MORE risk? Especially, a legendary investor that goes around writing books about "Thoughtfulness" and "Risk-Averse" investing? I am going to go out on a limb and say that Klarman is BULLISH.

I will go out even further on a limb and suggest or speculate that he may be EXTREMELY BULLISH. Why would I do this? Well, I beleive I am correct here, but anyone please correct me if I am wrong, but Hedge Funds do not have to report their "Short" positions. Klarman is noted to NOT be a "Short Seller" of stock, but a common value investor strategy is to "Short Put Option" contracts. One way to duplicate the risk profile of holding common stock is for an investor to "Go Long the Call Options" of a company paying a premium for those options, but also "Selling/Shorting Put Options" c-ollecting premiums that can be used to lower the cash outlay for the call options or wait for it.....buy even more Call Options with the premiums collected and further leverage the investment!!! Now, that would be EXTREMELY BULLISH!!! Now, I don't beleive a hedge fund has to report a "Short Option" position on its 13F-HR. So that is why I am definitely 'Speculating"!!!

I would add that other successful value investors are joining Seth Klarman in buying Microsoft. They are:

1.) David Einhorn, Greenlight Capital,

2.) David Tepper, Appaloosa Capital,

3.) Charles De Vaulx, IVA Funds (Former Manager of First Eagle Global and Co-Manager of Legendary Manager, Jean Marie Eveillard),

4.) Jean Marie Eveillard, FIrst Eagle Funds,

Richard Pzena, (Joel Greenblatt, author "The Little Book that Beats markets"calls 'The smartest investor I know"),

5.) Mason Hawkins (Longleaf Funds)

6.) Joel Greenblatt (Gotham Capital)

7.) Steven Romick (FPA Cresent)

8.) Arnold Van Den Berg (Century Management)

9.) Mario Gabelli

10.) Me

I know there is a lot of personal opinions regarding Microsoft. I don't really know anyone that has not owned it in the past. I know that most if not all lost money on it and hold a bad/poor opinion of it. The too "Don't Buy it", but that is how a stock gets into my "Strike Zone". Unfortunately, I have never had the opportunity to get a "fat pitch" while enjoying broad public consensus. As Buffett says "You pay a mighty high price for a rsosey atmosphere!!!".

Happy investing to all!!
AlbertaSunwapta
AlbertaSunwapta - 1 year ago
Joining or have been there long before Klarman?

As for the time horizon advantage, I completely agree, but with tech companies, that longer term time horizon has to be tempered by the huge ever looming risk of obsolesce.
vgm
Vgm - 1 year ago
Crafool,

You seem to one of those people who believes if you say something loud enough and repeat it, it must be true! Your posts are very 'loud' and erratic. Not a positive sign. Meaningful content is by far superior.

I'm perfectly aware of Klarman's background and accomplishments, and elite standing in the investing community and have the greatest respect for him, but it's a fool's game to blindly assume (as you do, with no actual rationale) that he cannot be wrong. He lost meaningfully on HPQ just in the past year, selling out at a substantial loss.

You asked: "What are the facts?" about his MSFT holding.

Yet you failed to address my earlier point: "The truth of the matter is that Klarman made MSFT a major equity holding in 2011, buying 12M shares at a cost of some $300M - and he's been unloading it ever since. I'd interpret that as him losing confidence in his thesis."

You then say "For discussion lets disect [sic] this move without bias or opnion [sic]." And then you proceed to give speculative thoughts, going on to conclude at the end of the same paragraph "So that is why I am definitely 'Speculating"!!!" That's quite a contrast :-)

It's very amusing that you put yourself on your list of "successful value investors".

'Nuff said.
crafool
Crafool - 1 year ago
Vgm,

In my piece, I mentioned Klarman not as a reason to Buy Microsoft, but rather stating one of his theories of investor advantage being "time". The following is what you posted:



[color=#000000; background-color: rgba(255, 255, 255, 0)]Vgm - 1 day ago[/color]

"I always remember what Seth Klarman points out regarding one of investors' greatest advantages is time horizon."

Any thoughts on why Klarman just sold out his position in MSFT? What do you see as the main threats/risks to an investment in MSFT?

I stated that Klarman the facts about Klarman because you posted an erroneous post. I merely wanted to clarify your blatant error in order for other readers not to be misled by you and your post.

I am sorry if my posting the facts and observations regarding Klarman is bothering you. Klarman nor any other Guru made me Buy Microsoft, but rather my own research told me to do it as I recommend that all investors do their own homework.

Yes, you are correct that I was trying to be funny by putting my name on the list of Guru investors in Microsoft. I am proud of my success as an investor. Am I or any investor perfect? No, but I do have a "buy and hold" portfolio on Gurufocus for anyone to view. Please check it out. Just click on my member name and the portfolio. I tried yours but it appears you don't have one. If you do, please send me access we can discuss or portfolios.

happy investing to all!!!

jonmonsea
Jonmonsea premium member - 1 year ago
How long has Klarman held the LEAPS (?) position? If he exercised in full, what would the nominal amount spent be?

I am long MSFT thru LEAPS and equity. Net of cash, it sells at a PEG of under 1. It seems like a good bet, if not an obvious home run. Thing is, if things go well, it could become a retroactively obvious home run. If things go shitty, the multiple might compress to something even more extraordinary, giving it a PEG of .5; isn't that where Peter Lynch said to mortgage the house and load up on the stock?
dougt
Dougt premium member - 1 year ago
Regardless of Klarman, it is a stock whose earnings and balance sheet seem to deserve a better price in the market. Great to be able to buy when the market is not efficient at pricing. Thanks everyone.
BEL-AIR
BEL-AIR - 1 year ago
I gotta admit....

I like this Crafool and his idea's....

Crafool... I been on gurufocus for years but never seen your articles before....

I like your thinking and investment style very much.

Nice article by the way I love the fact that your a buffetologist as well.

I gonna be reading all your past and future articles now.

Keep up the good work and write more articles, it is nice to read like minded individuals on here.
Cornelius Chan
Cornelius Chan - 1 year ago
This is a very good writeup - one of the few on GF I've seen that make a complicated thing simple.

I agree with BEL-AIR, the fact you mention Buffettology is a very good sign.

Your cocktail napkin figure risk analysis is also well done. I have read over and over again that the best investors can usually make an investment decision on the back of a napkin calculation. From Li Ka-shing to Uncle Warren.

BTW, I don't understand the controversy above re. Seth Klarman. To me, the article is nothing to do with Klarman and everything to do with the facts and figures of Microsoft and what happened with the share price relative to earnings and the rest of the juicy tidbits of stock analysis.

Koheleth
Koheleth - 1 year ago
My only thought: it is an emotional comfort -- uh oh -- when noted value investors join you in owing the same equity you hold, but then I recall Templeton saying, which I paraphrase here: "you can't get rich doing what everyone else is doing".

mrhiv
Mrhiv - 1 year ago
Another guy who loves low P/E and doesn't understand a piece of crap that is Microsoft, even Gates is complaining about the shit job Ballmer is doing. They are fine on balance sheets, sure! But hey! Research in Motion was too! They have a lot of BS products, they don't innovate and are pretty much f in competitive terms, i don't want to extend this because you have made your decision to buy a company that's only looking great on paper. Go around and talk with some guys from tech industry, Microsoft have 95% to become the next fallen angel. (Or get in f_ckd troubles like IBM before Palmisano)
mrhiv
Mrhiv - 1 year ago
mrhiv
Mrhiv - 1 year ago
Why? Is company performance and stock price directly correlated? > They USUALLY are looking for the next years in comparison of price paid today. That was the case.

First, revenue or sales is the one number that can not be manipulated > LOL, OF COURSE THEY CAN! I'm not saying Microsoft manipulate their revenues but there is many ways to manipulate revenues (read some David Einhorn thesis and you'll see a lot of this).

It isn't just that, but now the compsny pays a dividend of around $0.92 > And you think this is great for a tech company? Well is in the case of Microsfot that they don't have more any way to invest their capital efficiently so pay out for the oxymorons who hold the stock.

So as far is price risk, I think when looking at MSFT's historical P/E ratios that it is cheap at current levels and when I think of it relative to bonds I think 15% looks better than 2%. > JEEZ, do you think buying low P/E's companies reduces your risk?

I think one of the greatest tricks for simple analysis was provided to me by Mary Buffett. > You probably are joking around with us. Mary Buffett???? What is their top picks? GGG? KSWS years ago? You only see the past! Microsoft is doomed!

So if Microsoft doesn't stink, why did the share price do so poorly? Well, investors needed to understand that price paid dictates risk and future return regardless of asset and growth expectations. > You think probably the most covered company in the world by analysts don't know that? Or it's probably because between 2000-2005 the company was expensive (ok), but since than, the multiple's shrink #1 it's a gianourmous company with very LITTLE growth prospects, it deserves low P/E. #2 It's a TECHNOLOGY COMPANY, if they don't inovate in their products or services they going BANKRUPT!

DISCLOSURE: I THINK APPLE HITTED THE WALL TOO SO I'M NOT A APPLE LOVER AND MICROSOFT HATER (APPLE HAVE LITTLE PROSPECTS OF GROWTH RIGHT NOW! BUT BETTER THAN MSFT)

STOP BEIGN A QUANT. AS PETER LYNCH SAID, IF IT WAS ABOUT NUMBERS YOU SHOULD BUY A PC AND KEEP IT RUNNING AND INVESTING FOR YOU, BUT THE GAME ISN'T ABOUT IT!
crafool
Crafool - 1 year ago


Mr. HIV

Is that your real name? Seriously, an STD that kills people? You couldn't come up with something less offensive? Never mind. Let start with your rant regarding Microsoft.

You start with the following:

"Why? Is company performance and stock price directly correlated? > They USUALLY are looking for the next years in comparison of price paid today. That was the case." Yes, the market is forward looking, however your mistake is thinking that it is perfectly accurate about its future view. Since you stated that back in 2000, "That was the case." You verify my argument for the investors in Microsoft at that time my the enormous mistake of placing a then valuation on Microsoft's potential that even to this day exceeds its current valuation. Wow, that was a huge mistake. Mr. Market couldn't be that wrong? Well, clearly many investors were wrong, because stock prices are set by buying and selling.

Second you state:

"First, revenue or sales is the one number that can not be manipulated > LOL, OF COURSE THEY CAN! I'm not saying Microsoft manipulate their revenues but there is many ways to manipulate revenues (read some David Einhorn thesis and you'll see a lot of this)." You are right I probably misspoke when I stated "can not be manipulated". That was too strong of a statement, however the point I was making is tht revenue and sales numbers are not as easy to manipulate as earnings per share. Obviously, if I company or corporate officer wants to outright cheat then anything is possible but I would say looking at Microsofts revenue back in 2000 to the estimates of today. I feel very comfortable that these audited numbers are as good as the average numbers reported by publicly traded numbers and I will settle for them. Also, David Einhorn owns Microsoft stock and since he made his bones on accounting analysis (i.e. Bear Stearns), I think Microsoft's numbers are good for me too.

Third you state:

"..a dividend of around $0.92 > And you think this is great for a tech company? Well is in the case of Microsfot that they don't have more any way to invest their capital efficiently so pay out for the oxymorons who hold the stock." Yes, I think an extremely well covered and projected to rise by over 10% in the next 12-months by Valueline a current dividend yield of 3.32% is GREAT. Especially, a current yield that is 168% of the 10-Year Treasury Bond with future growth potential is GREAT! What is you definition of great? You are obviously a very tough judge when it comes to yield in this low interest rate environment.

As far as Microsoft "don't have more any way to invest their capital efficiently so payout..". As Buffett will tell you, great companies have a low need for additional capital where many average companies have tremendous capital needs. Software companies are companies that have low capital needs, but rail roads have high capital needs. I love companies that have low capital needs for they can pay me a dividend, buy back stock and continue to maintain their business for future years. Microsoft only needs to reinvest about $0.40 a share and will earn an estimated $2.95 a share in 2013. That leaves plenty of cash to pay me and to increase my percentage of ownership in Microsoft. I love that, and am confused with why you don't as well.

Fourth you state:

"You only see the past! Microsoft is doomed!"

This would be very prescient if only you had laid out some sort of basis for your opinion, but rather you leave the reader asking why is he so angry with Microsoft. As far as I see, I see a company with a history of executing its strategy which is maintaining its position within technology. Microsoft is entrenched in technology. It is a platform company and its is difficult to see how a company that is going to have estimated revenues of around $80 Billion in 2013 and over $40 billion of current assets is "Doomed". Are you sure you know what the word "Doomed" means? Please see: www.webster.com

Fifth you state:

"So if Microsoft doesn't stink, why did the share price do so poorly? Well, investors needed to understand that price paid dictates risk and future return regardless of asset and growth expectations. > You think probably the most covered company in the world by analysts don't know that? Or it's probably because between 2000-2005 the company was expensive (ok), but since than, the multiple's shrink #1 it's a gianourmous company with very LITTLE growth prospects, it deserves low P/E. #2 It's a TECHNOLOGY COMPANY, if they don't inovate in their products or services they going BANKRUPT"

Yes, I think that "..probably the most covered company in the word by analysts don't know that?". I obviously believe analysts are clearly not perfect. I am a value investor and count on finding inefficiencies in the market to exploit as the other notable value investing Gurus that are investing in Microsoft. Just a note many: CNBC reports the consensus of analyst recommendations. The link for Microsoft is http://data.cnbc.com/quotes/MSFT/tab/5.2 You will see a total of 34 analysts with 10 rating it a 'Strong Buy", 10 rating it "Buy" and 14 rating it "Hold". It is nice to see that there is still about 50% of analysts out their "on the fence" and able to jump higher. Stocks need more and more buyers to go higher.

"it's a gianourmous company with very LITTLE growth prospects, it deserves low P/E." I am not a growth obsessed investor, but an investor. I always remember that Buffett and his partner Munger always say growth is great if you can get it but price is more important. For fun, let's see if you were offered a company that had revenues of $1,000,000 and those revenues stayed flat to up only at the rate of inflation and that it earns after interest, taxes, and depreciation $500,000 annually would you buy this company for say $2,000,000? There is no to very low growth for the company, but who cares 25% after tax looks pretty good. I would say Microsoft's estimated $2.95 on a per share enterprise value of around $22 for a 13,4% after tax return is pretty good, especially since Valueline sees Microsoft earnings growing by over 10% a year through both organic growth and share repurchases. So I don't agree that Microsoft deserves a low P/E but rather a very high P/E that recognizes its durability and quality.

Lastly you state:"

STOP BEIGN A QUANT. AS PETER LYNCH SAID, IF IT WAS ABOUT NUMBERS YOU SHOULD BUY A PC AND KEEP IT RUNNING AND INVESTING FOR YOU, BUT THE GAME ISN'T ABOUT IT!"

You are correct that I will stop being a quant for I never have been one to begin with, rather I am a value investor that follows in the steps of the likes of Buffett, Munger, Templeton, De Vaulx, Berkowitz, and many others. I also don't see it as a game, but rather as a person that is buying businesses and not trading chips. I also follow what I believe it was John Maynard Keynes that said "Sir I will change my mind when the data changes. What do you do?". Well, Mr. HIV if you have any actual data I am willing to consider it and how it stacks up against my own analysis, but I haven't seen anything in your post worth considering. Obviously, I have provided some facts for your consideration. Is it enough for you to forgive your clearly emotional view of Microsoft? Also, please think about changing you name on Gurufocus. Considering yourself an STD can't be healthy for you!

Happy investing to all!

mrhiv
Mrhiv - 1 year ago

Microsoft

On May 26, 2011, Einhorn called for Steve Ballmer, CEO of Microsoft, to step down after Microsoft had been passed by both IBM and Apple[20] in market value.[21]

Well, probably Einhorn is there to shake the things up and not to stick with the status quo, and come on, you need to make assumptions about the future! Unless you estimate microsoft on their liquidation value, so you need to have an opinion about the growth prospects with a company managed by an oxymoron that said publicaly that iPhone would be a shame for Apple. And for god sake, learn a little bit from every guru here (every one HAVE A SINGLE point of analysis), even your Super Hero Buffett has changed his mind and developed his OWN STYLE, that's what makes market moves, different opinions, and no one can have sure about this, even seeing the facts, look the facts of best buy, research in motion and those fallen companies a couple of years ago, they were great! But the price didn't stop from falling, so don't assume the market isn't efficient most part of time (anyway you need to assume they will become efficient some point). Keep your toughts and chips on Microsoft, and sorry to my writing style, i am very emotional and if Carl Icahn can say 'naughty words' on national TV i can write and say anything i want here. Get some perspective from yourself and not from the others (you quoted almost the entire Berkshire Hathaway letters on your analysis). And yeah my name is offensive, i'll keep this anyway. Let's see where this dog gets you to. (give me a timeframe and let's see where this failed model of corp is going) I just don't sell short this sh## because in MY OPINION (not Buffett, not financial statements), the company is fairly valued at current prices and of course it's not going OUT OF THE BUSINESS, but this will underperform the STOCK market (if you like to outperform bonds, pick bonds and not stocks, just a tip).

Good Luck

mrhiv
Mrhiv - 1 year ago
Again, do your own research:

Go around and talk with some guys from tech industry
crafool
Crafool - 1 year ago
Mr. HIV,

I am glad to see you have changed your opinion that Microsoft is neither "Doomed" or "Going out of business". As you have mentioned, technology companies MUST continue to innovate in order to survive, however Microsoft is NOT an ordinary technology company. Microsoft is extraordinary company.

Let's ask a question, a technology company between 2007 and 2012 increased its earnings per share by over 83% or 16% per year, and did this without creating a significant new product until October, 2012 the last 2 months of the period! Also, the company was able to do this while Apple was coming out of the dirt and launching I-phones and Pads, cloud computing and mobile was occurring. Let us not forget that the "Great Recession" with corporate cost cutting and capital spending deferred was in absolute full swing. How was Microsoft able to do this? Microsoft is a "platform" technology company that is embedded into the world's technology infrastructure. I know you have heard of systemically important banks and financial institutions, and if technology had one as well it's name would be Microsoft!

As far as bonds, I would say Microsoft with its "fortress balance sheet"(thank you Jamie Dimon) and history of consistent EPS (Note: Microsoft's only earnings decline in the last 12 years occurred during the very "heart" of the Great Recession. Earning declined by 9% yoy) could be seen as an equity bond that has a growing coupon. Current earnings yield is around 13% after tax and around 15% before tax. If another recession hits, that would drop the yield by around 1.3% to 1.5% ands still far better than the 10-year Treasury bond.

What is the right price for such a yield on a quality company with liquidity? I would venture to say I can see Microsoft' s stock more than doubling in value in the next 3 to 5-years.

What technology or technology company do you think is going to replace them?

i can't think of any anytime soon!
mrhiv
Mrhiv - 1 year ago
You are still talking about past numbers, pal' i don't see its going to chapter eleven, but unless they start to innovate more, they can't survive with a faded business model, it's just like IBM when it goes into crisis, a big one, with a great plataform of customers, but nonethless they went into a big crisis. Sorry for aggressive speaking, but that's my opinion and i really wouldn't like to offend you. The fact is: innovation, new products release are a must for a tech company, like you said Apple was struggling for almost the same reasons, they brought a consumer-product CEO (Sculley, whom tought the same way managing PEP and AAPL, otherwise, when Palmisano gets to IBM from RJR Nabisco, he knew there was another picture to turnaround, but ok, Microsoft isn't in a crisis, yet!). They have a big bargaining power with consumers (like anyone wouldn't get fired buying IBM, the same applies to Microsoft softwares). I really can't see another one stealing they market share, but actually i see a market share shrinking for the numbers of substitutes (piracy is a big one along retail customers and free ones, OF COURSE, they revenue isn't going to zero, but with the fair price that company is, even a multiple based valuation shows that if company starts to slow down and losing competitive (wich i think that's already started) they can get in big trouble for common stock investor.) Think about IBM picture in late 80's and Microsoft now. You can be a GINORMOUS tech company, but it isn't in anywhere in U.S. constitution that prohibits a ginormous tech company to lose customers and shrink markets.) Another one big issue is they late move in every technology since internet, they still have a big edge on OS, and i think thats where they should focus and get a rid from dead weight. Seth Klarman didn't see that on HPQ and you cite him like a great investor in tech area. Unless they come with a big product or service they probably will ruin the company with that scum' management.

http://finance.yahoo.com/blogs/daily-ticker/former-microsoft-employee-says-steve-ballmer-must-175526168.html

Look at this interview with someone whom has more experience about the company than you and me, a former employee that was with the company since Bill slept in the floor from company HQ in N. Mexico. I would buy shares from MSFT if Bill got back to the control, but he is saving the world (no, i'm not being sarcastic)
mrhiv
Mrhiv - 1 year ago
Forget my words and just see that video.
mrhiv
Mrhiv - 1 year ago
Einhorn on Microsoft (Apple Presentation)

Over the last few years Microsoft has shown that one-time dividends, ongoing dividends, and sharerepurchases aren’t by themselves good enough to drive value in the face of a deteriorating competitive position
Cornelius Chan
Cornelius Chan - 1 year ago
Crafool,

Judging by your past articles, you have a knack for writing articles and calling stocks cheap when they are really cheap. So good job.

Regarding your call on MSFT, it closed at $28.01 when you wrote the article and it is now at $34.87: a 24.5% paper profit.

Looks like the bullish case won out... much to the chagrin of the novices and beginners who were gifting us with their "knowledge" in the comments no doubt. LOL

Thanks again for this long, informative and timely article. Better to buy when a stock is suffering than when it is doing greatly. Great advice.
Cornelius Chan
Cornelius Chan - 1 year ago
Another point about the rise of MSFT. Take a look at the ROE.

According to the gurufocus 10-year financials, back in '05 it was 25.50 and in '06 it was 31.40.

Last year ROE was 25.60 and lately it is 31.60.

From 25 in '05 ROE rose to 48 in '08. Was the company doing anything different than it is doing now? I don't follow the minutia of the company but I would think not. They do what they do what any company with a moat does and they suffer the vagaries of the market the same as the rest.

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