Analysts Cut Microsoft's Targets Based on Weaker PC Market

Microsoft (MSFT) needs a new crystal ball.

The software giant’s shares are coming under selling pressure this morning, thanks to the disturbing Q4 profit forecast yesterday from Intel (INTC). In fact, MSFT shares are actually more sharply than INTC. This is not complicated stuff: multiple signs point to slowing PC unit sales. And lower PC sales means reduced revenue for Microsoft from Windows and Office.

On its recent post-earnings conference call, though, Microsoft said it was expecting PC unit growth of 10%-12% for the December quarter, and 8%-12% for the June fiscal year. But nobody really believes that any more, especially after the commentary yesterday from Intel, National Semi (NSM), Applied Materials (AMAT) and Best Buy (BBY). Ergo, the Street has gone on a chopping spree, and estimates are headed south.

• Donovan Gow, of American Technology Research, cut his EPS estimate for the June 2009 fiscal year to $1.96, from $2.03. For FY 2010, he goes to $2.24, from $2.35. he noted that the company’s current guidance calls for PC unit growth of 8%-12%, which he said “is clearly too high.” AmTech sees ‘09 PC unit growth flat, down from from 4% growth previously. He now sees the Client division revs up 1%, down from 4%; the Business Division, including Office, goes to 10% growth, from 12%. He maintained a Buy rating and $26 target, but said there are few near-term catalysts for the shares.
• Katherine Egbert, of Jefferies, cut her target on the stock to $28 from $30. She trimmed her FY ‘09 EPS estimate to $2.03, from $2.08. “Intel’s preannouncement is harbinger of tight IT budgets, and no geography is safe,” she wrote. “Downward pressure on PC unit sales has compelled us to cut our forward estimates.”
• Philip Winslow, of Credit Suisse, trimmed his target to $33, from $35, and cut his FY ‘09 estimate to $2.02, from $2.06. The firm cut its ‘09 PC unit forecast to down 6.1%, from up 7%, which is obviously way worse than Microsoft’s forecast of up 8% to 12%. For Q4, they see units down 5.3%, versus MSFT guidance of up 10%-12%.
• Heather Bellini, of UBS, cut her target to $28, from $29. For ‘09, she goes to $1.92, from $2, and for 2010, to $2.18, from $2.34. 

She wrote:

We continue to believe Street estimates for MSFT are too high, and as new datapoints on the state of the economy are reported, estimates will trend lower to our below consensus level for revenue, operating margins and EPS. We continue to see Microsoft as not immune from the global macro environment, although we also believe it is better positioned than many others to weather the current storm given its strong cash flow generation and solid balance sheet.

• Adam Holt, of Morgan Stanley, wrote that he now sees ‘09 PC unit growth of 2%, down from 7%. He cut his FY ‘09 EPS estimate to $2.02, from $2.05.

He wrote:

The stew of negative retail and PC data is coming so fast, it is hard to keep up with, but our new estimates look reasonably conservative. Slower PC growth and software spending in CY ‘09 will pressure MSFT’s ability to meet consensus revenue, but leverage in the model and share buyback capacity make MSFT’s EPS more defensible than most peers.

MSFT on Thursday was down $1, or 4.9%, to $19.30, a 10-year low.