Microsoft seems to be a favorite stock of some of the biggest money managers according to GuruFocus. Seth Klarman, Donald Yacktman and David Einhorn have all been piling up on shares of Microsoft since the second quarter of 2011. What is their attraction?
Price: Microsoft (MSFT, Financial) is modestly priced at its current range of around $26-27 per share. This would put the P/E at approximately 10 with its fiscal year EPS $2.69. According to an in-house DCF calculation, MSFT has an intrinsic value of approximately $52.34 per share, which would give it over a 50% margin of safety to its current trading price. This calculation is based on a modest 10% growth in revenue, 12% increase in gross profit, and a 15% increase in net income looking out to 2015. This also takes into consideration our projected future cash flows discounted out from 2015, which would give MSFT equity a value of approximately $447,081,450,000 (if you take into consideration less debt and controlling interest and plus cash).
Terminal WACC 9.86%
Terminal Growth of Unlevered FCF 3.00%
Implied Equity Value and Share Price
Enterprise Value 406,576.45
Less: Debt (11,927)
Less: non-controlling interest (345)
Add: Cash 52,777
Equity Value: 447,081.45
Diluted Shares: 8,542
Equity Value Per Share $52.34
Dividend: MSFT has a current yield of about 3% which offers an attractive dividend, about 1% higher than the S&P average. Valueline projects that MSFT will increase their dividend by 25% to $0.80 per share from fiscal year 2011's $0.64 per share; this offers an attractive reward for those waiting for capital appreciation.
Ratios: MSFT management continues to run the company exceptionally well and this can be seen in some of the ratios compared to others in the industry.
Table 1
Looking at Table 1, we can see that MSFT is compared with arguably some of the biggest high-flyers in the market in AAPL, IBM and GOOG. While MSFT doesn’t have as much growth potential as the aforementioned, the chart shows that it is among the most efficiently managed in the industry (with ratios strikingly similar to AAPL) and overall was in the top three of the companies in the table when looking at return ratios. Astonishingly, it has the lowest P/E ratio at 9.38, a very attractive price for a quality company. Expect to see earnings per share increase in line with revenues per share as MSFT has quite predictable growth in revenue year over year averaging about 10% revenue growth from the period of 2003-2011.
Conclusion: So is this what the gurus are seeing, an exceptionally well ran company, with predictable revenue growth year over year selling for $0.50 on the $1, all the while paying you around 3% while waiting.
It looks as if this might be the case; however Microsoft will face many challenges as PCs are becoming obsolete technology, smart phones more prevalent and the market share of AAPL continues to steadily grow. They are combating these challenges with the development of their Windows Phone, the acquisition of Skype and strong sales with video game consoles Xbox and Xbox Kinect. Also Windows 8 appears to be launching in 2012 and there is also a rumor of a new and improved Xbox console.
From a quantitative analysis of the company's financials and looking at the ratios in Table 1, we see that management continues to run a well-oiled machine that puts up strong numbers. Qualitatively, its easy to see that MSFT management is still riding the wave of growth and willing to venture out for new opportunities, while realizing the importance of sticking to their guns with their steady software business. Look for MSFT to continue to seek new opportunities to strengthen their income statement and balance sheet and to start putting some of their $52 billion of cash to work.
The quality of management, the attractive dividend and valuation, along with the fact you are buying a great company at a good price makes this low-hanging fruit hard to pass up.
Disclosure: I do not hold or intend to hold any of the securities discussed in the next 72 hours. Also check out:
Price: Microsoft (MSFT, Financial) is modestly priced at its current range of around $26-27 per share. This would put the P/E at approximately 10 with its fiscal year EPS $2.69. According to an in-house DCF calculation, MSFT has an intrinsic value of approximately $52.34 per share, which would give it over a 50% margin of safety to its current trading price. This calculation is based on a modest 10% growth in revenue, 12% increase in gross profit, and a 15% increase in net income looking out to 2015. This also takes into consideration our projected future cash flows discounted out from 2015, which would give MSFT equity a value of approximately $447,081,450,000 (if you take into consideration less debt and controlling interest and plus cash).
Terminal WACC 9.86%
Terminal Growth of Unlevered FCF 3.00%
Implied Equity Value and Share Price
Enterprise Value 406,576.45
Less: Debt (11,927)
Less: non-controlling interest (345)
Add: Cash 52,777
Equity Value: 447,081.45
Diluted Shares: 8,542
Equity Value Per Share $52.34
Dividend: MSFT has a current yield of about 3% which offers an attractive dividend, about 1% higher than the S&P average. Valueline projects that MSFT will increase their dividend by 25% to $0.80 per share from fiscal year 2011's $0.64 per share; this offers an attractive reward for those waiting for capital appreciation.
Ratios: MSFT management continues to run the company exceptionally well and this can be seen in some of the ratios compared to others in the industry.
Table 1
Price | EPS | P/E | MKT CAP | Current Ratio | Debt to Equity | ROA | ROE | ROI | ||
MSFT | 25.83 |
| 9.38 | 217.29B | 2.6 | 20.88 | 23.77 | 44.84 | 33.1 | |
GOOG | 623.01 |
| 21.23 | 201.79B | 4.16 | 7.49 | 17.3 | 20.68 | 19.87 | |
ORCL | 28.91 |
| 16.47 | 145.84B | 2.76 | 40.03 | 12.65 | 24.22 | 16.22 | |
AAPL | 383.33 |
| 13.85 | 356.27B | 1.61 | 0 | 27.06 | 41.67 | 36.29 | |
IBM | 183.31 |
| 14.5 | 216.05B | 1.19 | 124.2 | 13.33 | 64.94 | 20.37 | |
YHOO | 14.85 |
| 18.15 | 18.42B | 2.67 | 1.14 | 5.68 | 9.83 | 6.42 | |
ADBE | 27.9 |
| 16.88 | 13.71B | 3.01 | 29.32 | 10.05 | 15.37 | 11.47 |
Looking at Table 1, we can see that MSFT is compared with arguably some of the biggest high-flyers in the market in AAPL, IBM and GOOG. While MSFT doesn’t have as much growth potential as the aforementioned, the chart shows that it is among the most efficiently managed in the industry (with ratios strikingly similar to AAPL) and overall was in the top three of the companies in the table when looking at return ratios. Astonishingly, it has the lowest P/E ratio at 9.38, a very attractive price for a quality company. Expect to see earnings per share increase in line with revenues per share as MSFT has quite predictable growth in revenue year over year averaging about 10% revenue growth from the period of 2003-2011.
Conclusion: So is this what the gurus are seeing, an exceptionally well ran company, with predictable revenue growth year over year selling for $0.50 on the $1, all the while paying you around 3% while waiting.
It looks as if this might be the case; however Microsoft will face many challenges as PCs are becoming obsolete technology, smart phones more prevalent and the market share of AAPL continues to steadily grow. They are combating these challenges with the development of their Windows Phone, the acquisition of Skype and strong sales with video game consoles Xbox and Xbox Kinect. Also Windows 8 appears to be launching in 2012 and there is also a rumor of a new and improved Xbox console.
From a quantitative analysis of the company's financials and looking at the ratios in Table 1, we see that management continues to run a well-oiled machine that puts up strong numbers. Qualitatively, its easy to see that MSFT management is still riding the wave of growth and willing to venture out for new opportunities, while realizing the importance of sticking to their guns with their steady software business. Look for MSFT to continue to seek new opportunities to strengthen their income statement and balance sheet and to start putting some of their $52 billion of cash to work.
The quality of management, the attractive dividend and valuation, along with the fact you are buying a great company at a good price makes this low-hanging fruit hard to pass up.
Disclosure: I do not hold or intend to hold any of the securities discussed in the next 72 hours. Also check out:
