Shareholder Activism: Why Apple And Not Microsoft? Microsoft Cash Screams For ASR

| About: Microsoft Corporation (MSFT)

In mid-August, Apple (NASDAQ:AAPL) got a nice boost over its 200 day moving average and rose sharply after Carl Icahn tweeted that he had taken a position in the stock and had spoken to Tim Cook.

This was shortly followed by a George Soros release this month that he had also taken a position in the stock.

And all of this followed the David Einhorn initiative in the late winter/early spring 2013, where David had tried to exert pressure on AAPL management to distribute its enormous cash hoard, only to wind up in Federal Court.

As all of this was going on, I began to wonder why, with Microsoft's (NASDAQ:MSFT) cash hoard, all the hedge fund activists had targeted AAPL and were ignoring MSFT.

Only ValueAct has taken an interest in MSFT, and I continue to question why there is no other headline-grabbing, publicity-loving hedge-fund, rock-star interest in Mr. Softee, given that the software giant has missed every major enterprise software initiative since Windows. MSFT missed the internet and only strong-armed its way into the browser market by getting into regulatory trouble, and then missed the last iPod and the iPhone and BYOD secular growth tsunami, and now appears to be falling short on the latest Tech Big 3 trilogy of Mobile, Social, and Cloud.

Let's face it, MSFT has missed badly on just about everything tech and software-related since desktop PC software in the 1980s and 1990s, and yet you never hear "boo" about "change."

Maybe it is simply because Bill Gates and Ballmer have a lock on the company and the board, and activists know it will be a dead-end effort. Still then, I ask where is the Board of Directors? Isn't there an independent faction that looks at the Zune, and Bing, and the lack of Cloud initiative, as well as the technology progressions and wonder: "What is our long-term plan as the technology landscape changes?" Are we (the board) just watching as the technology world passes us by, and the PC business seems to be entering a longer-term secular decline?

Is Tim Cook seen as a "weak hand" and Gates and Ballmer perceived as intractable, unflexible managers that will never adapt to the ever evolving winds of tech? Was Ballmer's prancing around the stage at one of the annual MSFT love-ins, chanting "give it up for me" as his gut was hanging out and sweat was rolling off his forehead, a sure sign to stay far, far, away for any intelligent hedge-fund activist ?

Here are some numbers we ran for both MSFT and AAPL in terms of cash-flow, free-cash-flow and balance sheet cash, not to mention some other metrics that might interest readers.

Comparison of MSFT and AAPL Cash and Valuation metrics

2014 EPS (est) 5% 9%
2015 EPS (est) 9% 3%
2014 EPS ($) $2.77 $42.56
2015 EPS ($) $3.03 $43.90
2014 P/E 12(x) 10(x)
2015 P/E 11(x) 10(x)
2014 rev gro (est) 5% 7%
2015 rev gro (est) 7% 3%
Bal sh cash ($'s bl) $77 $146.6
Cash p/s $9.12 $158.65
Cash p/s (net debt) $7.61 $140.30
Avg CFO (12 qtr's in bl's $) $28.3 $42 bl
AVG FCF (12 qtrs in bl's $) $25.2 $36 bl

Annual Div

$0.92 $12.20
Dividend yield 2.90% 2.40%
Capital retn'd as % of FCF 55% 70%
Price to cash-flow 10(x) 8(x)
Price to cash-flow (ex cash) 7(x) 6(x)

EPS = earnings per share

P/S = per share

CFO - cash from operations 4-qtr trailing

FCF - free-cash-flow 4-qtr trailing

Summary: Nomura and Rick Shurland is out with a research note this morning talking shareholder activism and MSFT, which we have been yammering about since MSFT reported its fiscal Q4 '13 earnings in July.

All the activists are salivating over AAPL, but there is just as much opportunity in MSFT.

The key metric for MSFT is that it is returning just half its quarterly free-cash-flow currently in terms of dividends and the share repurchase plan. MSFT's share repo plan expires September 30th, so expect some announcement on a bigger share repo plan.

Despite a big percentage of the MSFT cash hoard being held off-shore, I think an ASR (accelerated share repurchase) for a good chunk of the stock would work.

MSFT is growing its balance sheet cash about $3 billion per quarter.

I do think MSFT is ripe for shareholders to unlock value. So far only ValueAct has shown the stomach to take a position in the stock (although I'm not sure of the size -- I heard about 1%).

Here is our blog post written on August 8th, detailing some of MSFT's cash position, but we wanted to draw the comparison to AAPL on this post to note the similarities in cash-flow and overall valuation.

An ASR is an accelerated share repurchase plan where shareholders tender their shares. It would seem to be perfect for MSFT and could be announced in line with the 2014 dividend and share repo plan in the next 30-60 days.

The bottom line is that something or someone has to light a fire under MSFT to drive shareholder value. MSFT's cash-position and cash-flow is as good as or in some cases better than AAPL's.

Disclosure: I am long MSFT, AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.