Monday, July 23, 2012

Microsoft - Value or Not?

I was recently sent a link to an article on Why Windows 8 Made me Sell Microsoft (MSFT).  The article says that Windows 8 sucks and is going to be bad for Microsoft.  Maybe it will suck...  I don't know that for sure.  This was my response. 

I am long MSFT. Let me tell you why.

Over the past 10 years they have grown revenue by 13%, earnings by 10%. Over the past 5 years they have grown revenue by 14% and earnings by 13.5%. Yes it is value stock, as we will see, but by those numbers you would think MSFT is a growth stock... but anyway.

Last year they generated $31.6 billion in cash from operations and the capex forecast is $3 billion in the coming fiscal year. That means the owner earnings are running around $3.40/shr. They are generating $2.4 billion in free cash per month and have 63 billion of cash at end of the last quarter. I understand the markets believe they will squander some of their cash on dumb acquisitions (they have before), but let's get serious MSFT is a licence to print money.

Many people look at the share price for the past ten years and have no idea about the underlying business performance of the different divisions. I don't know the future, but today you can buy MSFT at 6.4 times owner earnings or a 15.5% owner earnings yield (net of cash). That is cheap, dirt cheap. If I quoted these figures without giving the name of the business, most every investor would be chomping at the bit to know what company I am talking about. Tell them it's MSFT and they aren't interested.

I can't predict the future but I do know the company's operating performance over the past 10 years has been phenomenal. The past 5 years have been even better. Windows 8 may be great or it might be a flop, Vista was a flop too. I do know that Windows is so entrenched in businesses and consumer PC's that they are not going anywhere. Growth in Servers and Tools has been good and Entertainment has been fantastic. The Windows division was down slightly last year.

I just listened to the conference call and came away with the complete opposite impression regarding the outlook of the company.

So let me highlight my reasons why I believe differently:

1) My opinion was based on financial performance that have yet to show any hint of let up, while this guy "thinks" that Windows 8 will be a flop.

2) Secondly even if he proves correct that Windows 8 is a flop and earnings fall flat or down in the Windows division, I still have an large margin of safety. (My cost is also 25% lower than current market prices)

3) I have different opinion of MSFT's entrenched moat, particularly in businesses. Change just isn't an option.

4) While this goes counter to my recent blog posts on social metaphysics, it still is a fact... MSFT is the most widely held stock by value investors and the second most widely held business by % of assets (the first is Berkshire).  You can see the list at the link below. 

Best Regards,

Disclosure: Long MSFT & BRK.b

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