Microsoft (NASDAQ:MSFT) rose over 40% in 2013, not including the dividend, and is up another 7% in terms of its capital gain year-to-date in 2014.
The stock started to move in April, 2013, after ValueAct, the quiet, collaborative, activist hedge-fund giant announced that they had acquired a position in the stock and were looking for a seat on the Board.
This promptly shook up the Microsoft Board, ultimately leading to Steve Ballmer's ouster, and the appointment of Satya Nadella, the new CEO who is looking to transition the software giant into the Cloud, Applications, and the growthier areas of software technology.
That brings up today: a lot of value has been unlocked in MSFT's stock, as the total 1-year return on MSFT is roughly 43%.
The surprise in the December quarter reported in January '14 was the operating margin of 32%-33%, higher than expected.
A number of astute investors have now turned bearish on the stock, thinking that a lot of the move is over.
Technically, MSFT's stock looks very good, as the recent push towards $40 per share has taken out the November '07 high of $37.50.
Fundamentally, according to current analyst consensus (per Thomson Reuters), here are the 2014, 2015 and 2016 expectations for MSFT EPS and revenues:
While a number of sell-side analysts and investors now think that the stock is dead money, note the expected acceleration in EPS over the next few years. (That is either a vote of confidence for Satya, or baseline expectations for MSFT's current core business segments.)
I'm still getting up to speed on the new division segmentation, but "commercial" (presumably the Windows and Office apps) are 44% of revenues and 66% of gross margin as of the Dec. '13 quarter, and MSFT's challenge through the years has been to grow other areas around the core Windows business (which Steve Ballmer had a tough time doing).
For me personally, one of the primary reasons we held MSFT's stock through thick and thin of the last 5 years was the cash-hoard and the free cash flow generation.
MSFT had $80 billion in cash on the balance sheet as of 12/31/13, and adds between $3-4$ billion per quarter to the balance sheet cash. (The issue remains how much is US-domiciled, which from what we've read, isn't much, something in the area of 30%.)
MSFT is now returning 75% of its annual free cash flow generation to shareholders in the form of dividends and buybacks. What has always puzzled me is that with the Icahn frenzy around Apple (NASDAQ:AAPL), why Microsoft didn't see the same attention given its cash position. I can only guess is that with Bill Gates still being the primary shareholder, although his percentage is declining in terms of the stock held, Mr. Gates wasn't interested in this return.
AAPL's stock is trading at a little over 3(x) balance sheet cash, while MSFT's stock is trading at 4.75(x) balance sheet cash.
Despite the number of analysts that turned cautious on the stock after the nice run, we are maintaining our position in MSFT stock into Thursday's earnings release on April 24, '14.
When MSFT reports after the bell on Thursday's close, analyst consensus is expecting $0.63 in EPS on $20.4 billion in revenue for expected year-over-year declines of -7% and -1% respectively.
Without being too critical of Ballmer, since his departure, MSFT looked to fix some of the Surface issues, and his thoughts in repositioning the company into the growth areas of software technology are hitting all the right notes. For MSFT, even that is progress, given what has transpired since early 2000.
We are going to continue to be patient with the stock and maintaining our position.
We'd be prepared to add to the position near $35-$36 or the 200-day moving average, or the low $30s, which is the upward-sloping trend line off the 2009 market low, but the odds of MSFT declining in price that much seems remote.
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.