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Mr. Softie reported earnings after the close today and they were awesome. The guidance for next quarter was a little weak, but it doesn't matter. MSFT only makes money in three of its seven product lines so, in other words, more than 100% of its profits come from Windows, Office and server products. All three of these segments have major releases coming up next calendar year, which we believe are likely to drive robust growth in sales and profits (as has always been the case historically), but none will impact the next quarter. If anything, some buyers may hold back on purchases until the new versions come out, despite MSFT's coupons to offset this.

MSFT has grown its revenues at 10-11% annually for the last two quarters without any new products, so let's assume profits keep pace (in fact, given the operating leverage of the business, profits will likely grow faster). Then, add in the $36.2 billion share repurchase authorization, equal to 13% of shares outstanding -- let's assume this gets done over two years, so the share count shrinks 5% per year for the next two years (MSFT bought back $7.5 billion last quarter, yet cash went down only $2 million -- that's the amazing part: MSFT is buying back enormous amounts of stock, but its profits are so enormous that cash barely budges). So, profit growth plus share buybacks gets you to 15% EPS growth minimum.

So where are analysts' EPS estimates? Up 13% for the FY ending June 2007 and another 15% for FY 2008. Have the analysts forgotten about all of the new products?!?!

We think profits will be a lot higher than current estimates for FY 2007 and 2008 -- a nice catalyst for a stock that's still cheap enough not to need one: net of cash, it's trading at 17x FY 2007 estimates (which are too low).

Suffice it to say, we're more likely to be buying than selling these days, despite the stock's run over the past few months.

Full disclosure: Long MSFT.

Source: Microsoft's Earnings from a Value Manager's Perspective