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Hedge Fund Managers See Microsoft as a Bargain


Parsad

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myth465

you make a very good point.

 

If you look at the cash flow statement for the last 6-7 years, the company has returned almost 140 Bn to shareholders via dividends and share re-purchases. now some of this is definitely to offset options related dilution (which is around 1% per annum), still they are returning close to 80% of annual cash flow to investors. I think it is likely that they will continue with it.

 

At the same time, the company has always had a big cash hoard so the management has definitely pissed some amount of the cash away ...no doubts about it . we can attribute it to management's stupidity or the nature of the tech business itself where some amount of investments in hindsight appear a complete waste of effort, but has to be done to flank your current products or atleast not concede without a fight :) or maybe just keep the troops busy and excited.

 

I think we expect some amount of cash flow to be wasted on all kinds of new trends - mobile OS, search etc. however all this spend (which has happened in the last 10 years too) should not dent the overall cash flows too much - unless they do some big and stupid accquisition.

 

to your point of overanalysing the data :) ..guilty as charged. you see, i have only recently started investing in the US market (have invested in indian stock markets till now). as a result i am overcautious to a certain extent.

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to your point of overanalysing the data :) ..guilty as charged. you see, i have only recently started investing in the US market (have invested in indian stock markets till now). as a result i am overcautious to a certain extent.

 

Also remember Microsoft was trying to pay quite a bit for Yahoo a few years back. FCF gets thrown out of wack when you have deal makers.

 

Let me have some of the cautiousness and I think we will both be better off. LOL

I think it helps though, and will need to get deeper into the details once things slow down at work. They say only the paranoid survive.

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"If you look at the cash flow statement for the last 6-7 years, the company has returned almost 140 Bn to shareholders via dividends and share re-purchases. "
Now we can at least rest the argument that company is not returning money to shareholders.

 

Regarding to Yahoo buy, I thought it was an insanely expensive deal initially, it's more a desperation of the leader at that time, good thing the deal didn't go through and he's left the post, with a more capable person running the online service division now. But Yahoo actually has some really good assets so even the deal went through it shouldn't be a disaster either. The 40% stake Yahoo has with Alibaba holding (could worth $10+ billion), 34% in Yahoo Japan, search deal with MSFT-- getting 88% revenue for essentially nothing for 10 years, and the operating business. I think Yhoo is a great value play at the moment.

 

http://www.marketwatch.com/story/asian-assets-likely-a-hot-topic-at-yahoo-meeting-2010-05-25

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MSFT is cheap when adjusting for cash on the balance sheet.

 

Probably not a bad speculative trade.

 

But would Graham and Buffett invest -- almost certainly not...they (as well as almost every investor) have no clue what MSFT's cash flows will look like in 5-10 years.  Buffett could always surprise but he is firmly on the record stating he would never buy MSFT for the reason cited.

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I think Graham would have purchased MSFT given the low yields of bonds.  In reading his early writings, he looked at firm values first then values of the firms securities.  For bonds the bogie was about a 10% yield, 12% for preferred stocks and 15% for stocks.  MSFT has a high FCF yield (10%+) and its CF stability is very high when compared to most other firms.  MSFT has a proven large moat.  The biggest issue is re-invesmtent but given thier stock repurchases they have been at least partially right.  The big risk is a large expensive acquisition.  I you look at MSFT common stock as a bond or preferred, it boecomes quite attractive.

 

Packer

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