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Microsoft earnings


shalab
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Microsoft announced its earnings and its E&D division did really well. On the downside, the growth in windows slowed and came in lower than expectations weighing in on the stock.

 

MSFT is clearly a value stock. However lack of growth in windows will hold the stock price in check.

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Just today noted that one of Barron's featured highly regarded value investors ( Charles Clough..Clough Capital Partners  ) says MSFT is his largest position,and expects the market to recognize that it is worth about 30 % more than present levels. He advocates that they increase the divdend to 4 % ,since their  free cash flow return is above 11% or so.

 

Green Wave

 

 

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MSFT is ok for the short term ( 2 to 4 years maybe). Once the big wave of the whole world moving to smaller devices, MSFT will be mostly left behind and their revenues will begin to dry up slowly. Also, MSFT's internal company culture is too bad, it's inconceivable that they will keep their innovation going as nearly well as their competitors. So, I think holding MSFT bears tremendous risks in the long term (5+ years).

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MSFT is ok for the short term ( 2 to 4 years maybe). Once the big wave of the whole world moving to smaller devices, MSFT will be mostly left behind and their revenues will begin to dry up slowly. Also, MSFT's internal company culture is too bad, it's inconceivable that they will keep their innovation going as nearly well as their competitors. So, I think holding MSFT bears tremendous risks in the long term (5+ years).

 

 

I would concur with this view.  Anyone who thinks that MSFT is a value stock should open up their Microsoft Excel spreadsheet and run a number of hypothetical discounted cashflow models.  They really only take about 5 minutes to build a 10 year earnings forecast, apply growth rates and discount rates, and then see what you get.  When you do this, think very carefully about what sort of discount rate that you would need to apply to MSFT's earnings after about year 5 or so.  IMHO, those earnings are so uncertain that I'd want a 10-15% discount rate on anything past about year 5.

 

To be comfortable with MSFT at $27, you need to either be very confident about the distant cashflows (and thus use a relatively modest discount rate) or you need to assume some healthy earnings growth.

 

I'm not saying that MSFT will implode any time soon, but I just can't get comfortable with the numbers and uncertainty.

 

 

SJ

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MSFT is ok for the short term ( 2 to 4 years maybe). Once the big wave of the whole world moving to smaller devices, MSFT will be mostly left behind and their revenues will begin to dry up slowly. Also, MSFT's internal company culture is too bad, it's inconceivable that they will keep their innovation going as nearly well as their competitors. So, I think holding MSFT bears tremendous risks in the long term (5+ years).

 

 

I would concur with this view.  Anyone who thinks that MSFT is a value stock should open up their Microsoft Excel spreadsheet and run a number of hypothetical discounted cashflow models.  They really only take about 5 minutes to build a 10 year earnings forecast, apply growth rates and discount rates, and then see what you get.  When you do this, think very carefully about what sort of discount rate that you would need to apply to MSFT's earnings after about year 5 or so.  IMHO, those earnings are so uncertain that I'd want a 10-15% discount rate on anything past about year 5.

 

To be comfortable with MSFT at $27, you need to either be very confident about the distant cashflows (and thus use a relatively modest discount rate) or you need to assume some healthy earnings growth.

 

I'm not saying that MSFT will implode any time soon, but I just can't get comfortable with the numbers and uncertainty.

 

 

SJ

Did you incorporate the $6 in cash per share on the B/S?

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MSFT is ok for the short term ( 2 to 4 years maybe). Once the big wave of the whole world moving to smaller devices, MSFT will be mostly left behind and their revenues will begin to dry up slowly. Also, MSFT's internal company culture is too bad, it's inconceivable that they will keep their innovation going as nearly well as their competitors. So, I think holding MSFT bears tremendous risks in the long term (5+ years).

 

 

I would concur with this view.  Anyone who thinks that MSFT is a value stock should open up their Microsoft Excel spreadsheet and run a number of hypothetical discounted cashflow models.  They really only take about 5 minutes to build a 10 year earnings forecast, apply growth rates and discount rates, and then see what you get.  When you do this, think very carefully about what sort of discount rate that you would need to apply to MSFT's earnings after about year 5 or so.  IMHO, those earnings are so uncertain that I'd want a 10-15% discount rate on anything past about year 5.

 

To be comfortable with MSFT at $27, you need to either be very confident about the distant cashflows (and thus use a relatively modest discount rate) or you need to assume some healthy earnings growth.

 

I'm not saying that MSFT will implode any time soon, but I just can't get comfortable with the numbers and uncertainty.

 

 

SJ

Did you incorporate the $6 in cash per share on the B/S?

 

Nope, didn't go that far.  Just discounted the earnings and assumed that they'd all eventually get back to shareholders (which is already a heroic assumption).  Even chopping off the $6, you'd need to forecast some growth or use a charitable discount rate to hit $21.

 

I refuse to forecast growth for MSFT, and I refuse to give them a pass by using a low discount rate.  I love their monopolies on O/S and office software, but I really don't like the shifting sands upon which their edifice is built!

 

SJ

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MSFT is ok for the short term ( 2 to 4 years maybe). Once the big wave of the whole world moving to smaller devices, MSFT will be mostly left behind and their revenues will begin to dry up slowly. Also, MSFT's internal company culture is too bad, it's inconceivable that they will keep their innovation going as nearly well as their competitors. So, I think holding MSFT bears tremendous risks in the long term (5+ years).

 

 

I would concur with this view.  Anyone who thinks that MSFT is a value stock should open up their Microsoft Excel spreadsheet and run a number of hypothetical discounted cashflow models.  They really only take about 5 minutes to build a 10 year earnings forecast, apply growth rates and discount rates, and then see what you get.  When you do this, think very carefully about what sort of discount rate that you would need to apply to MSFT's earnings after about year 5 or so.  IMHO, those earnings are so uncertain that I'd want a 10-15% discount rate on anything past about year 5.

 

To be comfortable with MSFT at $27, you need to either be very confident about the distant cashflows (and thus use a relatively modest discount rate) or you need to assume some healthy earnings growth.

 

I'm not saying that MSFT will implode any time soon, but I just can't get comfortable with the numbers and uncertainty.

 

 

SJ

Did you incorporate the $6 in cash per share on the B/S?

 

Nope, didn't go that far.  Just discounted the earnings and assumed that they'd all eventually get back to shareholders (which is already a heroic assumption).  Even chopping off the $6, you'd need to forecast some growth or use a charitable discount rate to hit $21.

 

I refuse to forecast growth for MSFT, and I refuse to give them a pass by using a low discount rate.  I love their monopolies on O/S and office software, but I really don't like the shifting sands upon which their edifice is built!

 

SJ

 

FWIW, I just did a quick DCF calc... I use a starting FCF/share of $2.11 (based on last year's EPS), 5% growth for next 5 years and 0% growth into perpetuity.  Then I discount this stream of FCF by 10% annual rate for the FCF in the first five years and by 15% annual rate for FCF in the subsequent years.  I get a sum of $20 for these FCF.  Adding the $6/share cash would be $26 which is about today's price.

 

In comparison, earnings have grown 10% CAGR for the last 3 years which include year 2008.  There is none-to-minimal loss in market share in their core windows and office products thus far.

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