It is the time of the year when market columnists offer up their predictions for the New Year. I am no exception to this long tradition and I have been posting my 2014 predictions in various columns (I, II, III & IV) over the last two weeks. We are now up to prediction #5.
Prediction #5: Microsoft (NASDAQ:MSFT) will top $40 a share in 2014.
I think the recent pullback in Mr. Softie on news that Alan Mulally will not be assuming the CEO position is a long term buying opportunity. First, I don't believe a leader whose expertise was manufacturing is the ideal fit to run a software company. I also find myriad other reasons to be positive about Microsoft's prospects in 2014.
The overall market is selling for ~15x forward earnings and the consensus is calling for an average of 4% revenue growth in the New Year, which would be an improvement over the 2% sales gains booked in 2013.
Microsoft, on the other hand, is priced at under 12x forward earnings. Revenue growth is also expected to be in the 6% to 8% range in the New Year. In addition, this does not take into account the company's over $70B (~25% of market capitalization) cash hoard. The shares also yield 3.1%.
Whoever is hired to be the new CEO should be a breath of fresh air and positive catalyst after 13 years under its current leader, Steven Ballmer. I would expect the new leader to take several steps that should enhance shareholder value.
First, something should be done with the company's search business which is a distant and money losing number two to the juggernaut in the search business, Google (NASDAQ:GOOG). The new leader might also decide to spin off Xbox and other non-core businesses as well.
In addition, I believe the new leader will better utilize the company's huge cash & marketable securities pile. These measures could include accelerating dividend payouts, an increase in the company's stock repurchase program and strategic acquisitions.
A Growing Cloud Presence:
I would also expect the new CEO to accelerate the company's transition to the "Cloud". Microsoft already has two cloud businesses (Azure and Office 365) that are growing rapidly and have over $1B in annual revenues.
Microsoft is already the #2 cloud software company by revenue and I would expect any acquisitions in the near term will be in support of accelerating this transition. I would look for the new leader to better highlight the company's cloud businesses and results as they are currently underappreciated by investors & the market.
Microsoft is undervalued versus the market given its growth prospects, incoming new leadership and its fortress AAA rated balance sheet. Taking out cash I think the market should reward Microsoft with a minor multiple expansion of ~10x earnings (sans cash) by the end of the year. This gets us to roughly $40 a share. Combined with an over three percent dividend, this results in a ~15% total return in 2014. This is significantly above the 5% to 10% return I project for the overall market in the New Year. BUY