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Microsoft (NASDAQ:MSFT) is scheduled to report their fiscal 2nd quarter, 2013 earnings on Thursday, January 24th, with analyst consensus expecting $0.75 in earnings per share (NYSEARCA:EPS) on $21.7 billion in revenue for expected year-over-year growth of -5% and +4% respectively.

There is little mystery about MSFT's depressed trading action this year as the stock was up just 3% on the calendar year but with the 3% dividend, managed a mid single digit percentage gain, certainly better than Intel's mid teens decline.

Both earnings per share and revenue estimates have declined slightly since the October '12 earnings report.

2012 was thought to be the worst year for PC sales since 2001, and although the data varies, it looks like PC sales fell at least 5% - 7% in the 4th quarter, 2012.

As the song so often goes in the business of business, what was once a strength of MSFT's, (80% - 90% market share of the desktop operating system market) is now an Achilles heel as the cloud, the virtual desktop, and the tablet (not to mention the Mac) are all looking to displace the PC and the laptop as the prime business productivity tool.

My assumption is that the death of the PC (thus far) and the desktop operating system might be greatly exaggerated.

However, the writing is also on the wall as the PC faces longer-term competition and gradual erosion of market share.

While last quarter's eps miss of $0.07 was probably closer to $0.04 given the deferral (accounting) issue around Windows 8 and the October release, lower Windows and Office sales also hurt the quarter, which can be attributed to the PC sales drought.

Personally, I think Microsoft is good for another move into the low $30's if only PC sales return to just low-single digit annual sales, and if the economy gets some job growth, mid-single digit sales are still possible. I just don't think a dominant, productivity-driven technology like a desktop or laptop that has been around 25 years, disappears overnight.

Microsoft's revenue, earnings per share and p.e history
Year endedRev groEPS groP/E
2015 (est)9%12%8(x)
2014 (est)8%12%9(x)
2013 (est)9%6%10(x)
20127%1%10(x)
201111%28%10(x)
20107%24%13(x)
2009-3%-11%16(x)
200818%28%15(x)
200715%17%19(x)
200611%2%22(x)
20058%-3%22(x)
200414%20%22(x)
200313%9%27(x)
200212%7%29(x)
200110% 31(x)

Although the PE history has varied by quarter, in fact we have seen over a decade of PE contraction on Microsoft, which in fact makes sense as earnings growth has slowed dramatically from the 1990's consistent 20% - 30 growth.

The attached chart shows MSFT's price history perfectly, and if you look at the bottom third of the chart, shows that MSFT is now as oversold as it was at the market lows near 2009.

(click to enlarge)

We just bought some more MSFT recently adding to positions near $26. If the stock dropped below $25 here on heavy volume, it would worry us.

With consensus analyst estimates of $2.07 and $3.20 for fiscal '13 and '14, MSFT is trading at 9(x) and 8(x) forward earnings not to mention 6(x) cash flow.

It is hard to believe that the stock can get much cheaper.

MSFT will shortly have more cash on the balance sheet than when they declared their special dividend in late 2003. As of 9/30/12, MSFT had $66.7 billion sitting in cash. What they do with the cash is a mystery. The share repo program is almost up - it will expire in Sept. 2013, so they should up the share repo, but 85% of the cash is custodied overseas, and they have said the special dividend was a poor use of capital.

For patient value investors, the stock is cheap here, MSFT may continue to underperform, however something has to give in the next few years. Either PC sales will start to grow again at normal rates, or the company has to make an acquisition to put it in the center of the cloud or one of the other emerging technologies.

We would buy more near $26 per share.

Source: Microsoft Earnings Preview: A Decade Of PE Contraction - Stock Technically Oversold