MSFT: Still A Growth Stock Carrying a Value Price
I can see Microsoft being one of the more hotly debated stocks on the blog.
"It's dead money" (down almost 10% this year after doing nothing for the last 5 years vs "Its financial condition is too strong to be discounted this much this long"
I tend to agree with the latter of those perspectives. This company has way too much going for it NOT to be considered at these bargain-basement prices (around $23-$24 right now). This article from the WSJ on Wednesday, May 10th supports my thoughts about the company. (I will paste the full body of the article into the comments section of this entry)
So let's look at the usual criteria for value stocks: a relatively low price-to-earnings ratio; low price-to-earnings-growth ratio; a steady and predictable cash flow; low debt; and out-of-favor status with growth investors. For Microsoft, trading around $24 a share, its trailing P/E is 18.9; its forward P/E based on this year's expected earnings is 18.7, just above the S&P 500-stock index average trailing P/E of 17.5, but well below the software-industry average of 23.6. Its price-to-earnings-growth ratio is 1.67, also well below the industry average of 2.24. Its price-to-sales ratio, at 5.81, remains a little high, albeit in line with industry norms.
I also theorize that one of the SAFEST ways to pick up easy (albeit smaller) profits is to do so on unvolatile stocks of super companies selling at extreme discounts. Over the last three to six months, similar investments in Wal-Mart and Anheuser-Busc would have yielded easy 5 point gains (approx 15%) on dividend-paying companies that one would want to own at any fair price (let alone a significant discount).
posted by Jeff @ Thursday, May 25, 2006
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Still a Growth Stock, Microsoft Carries A 'Value' Price Tag
By JAMES B. STEWART
SmartMoney
May 10, 2006; Page D3
Is Microsoft a "value" stock?
At one time, the very question would have been absurd, since Microsoft embodied the notion of growth.
For the past 10 years -- a period when Microsoft was already a mature company -- its sales have risen at an annualized rate of more than 20%, cash flow at 22.5%, and earnings at 24%, according to Value Line research firm. That surely keeps it solidly in the growth camp, doesn't it?
After Microsoft stock's dizzying fall at the end of April, when it plummeted more than 10%, investors have to wonder.
Even before that plunge, Microsoft shares had been stagnant for years. Nothing seems to have gone right for what was once the most illustrious of technology names. Giving away billions in a one-time dividend to shareholders did nothing except convince people Microsoft didn't know what to do with its cash. Its future has been clouded by the rise of Linux and the open-source software movement, which poses a long-term threat to the near-monopoly status of its proprietary Windows operating system. Windows' latest incarnation, the forthcoming Vista, has been delayed, which spooked investors hoping for a midyear revenue burst. Google has eaten Microsoft's lunch in the burgeoning Web search and advertising business, in which Microsoft has fallen to a distant third, behind both Google and Yahoo, and continues to lose market share. At the same time, it remains plagued by allegations of unlawful monopolistic behavior, most notably from the European Union.
[Microsoft Share Price]
Compounding these woes, Microsoft simultaneously announced weaker-than-expected revenue and greatly increased capital spending, estimated to rise to $2 billion a year. Investors bailed out, driving Microsoft shares last week to a low of around $23.
So let's look at the usual criteria for value stocks: a relatively low price-to-earnings ratio; low price-to-earnings-growth ratio; a steady and predictable cash flow; low debt; and out-of-favor status with growth investors. For Microsoft, trading around $24 a share, its trailing P/E is 18.9; its forward P/E based on this year's expected earnings is 18.7, just above the S&P 500-stock index average trailing P/E of 17.5, but well below the software-industry average of 23.6. Its price-to-earnings-growth ratio is 1.67, also well below the industry average of 2.24. Its price-to-sales ratio, at 5.81, remains a little high, albeit in line with industry norms.
If these numbers don't exactly scream value, they're still pretty low, given Microsoft's earnings and sales growth. Lost in the recent dismay over Microsoft's soft revenue and capital-spending plans was the fact that earnings rose a healthy 16% from the previous year. Moreover, Microsoft retains an impeccable balance sheet, with mountains of cash, no debt and a healthy and reliable cash flow. Even so, it's being shunned by many investors who have lost patience and thrown in the towel.
While the case can be made for putting Microsoft in the value camp, the question is where the stock is going from here.
Concerns about capital spending may be overblown. This is exactly what Microsoft should be doing to compete with Google and other rivals. The Vista delays don't seem all that serious. Anticipation of the new operating system is no doubt one of the reasons revenue fell short this quarter, and it should merely be pushed back to later quarters. Worries about Linux and open software, meanwhile, are long-term concerns that aren't likely to affect Microsoft's dominance for years, if ever.
For patient investors, Microsoft could be attractive at these recently depressed levels. You could simply buy the stock, or consider long-term call options. (A call is an option to buy a security at a specific price, typically above the current price.) One measure of depressed investor sentiment on Microsoft is that the call options have hardly any premium built in. With Microsoft stock just under $24 this week, the January 2008 options with a strike price of $20 were just $5.50; the $15s were $9.50. I took advantage of these low premiums to add some of these calls to my holdings; I already own some Microsoft shares, which I've held for years.
Microsoft is still firmly planted in some major growth sectors, including Internet search, software applications, even videogames and entertainment. It's too big to ever recapture the heady days of its youth, but it deserves to regain its status as a growth stock. At the moment, it just happens to be priced for value.
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