In September I blogged "A case for Microsoft" in an attempt to explain why MSFT has been a poor investment over the last decade. Since then, Microsoft has posted first quarter results exceeding most expectations. This post is in part an updated graphical representation that compliments my last MSFT post visually showing why there may be potential going forward.
First, let's look at the P/E vs. earnings over the years. This chart explains why MSFT was a poor investment over the last decade. I suggest reading my last posting which adds additional color to the chart.
click to enlarge
I believe it's becoming increasing clear that the P/E has bottomed, or at the very least has little downside from here. This chart also clearly shows MSFT's P/E was too high considering MSFT's transition from a growth to a value investment.
What about operations and FCF?
Clearly, their operating metrics continue to trend up over time, which should put upward pressure on the stock price. Added strength that will continue to attract value investors is that the dividend has increased at a compounded rate of 10% since FY2006.
The rub with Microsoft is that they have shot themselves in the foot more than once (vista, search, mobile, music) forcing them to play catch up- to which Ballmer should be held accountable, and who knows, his days may be numbered. The amazing thing is, despite it all, their results continue to improve. So with that, let's look at the business segments.
Even with the mistakes, it cost them about flat growth in the online segment. Entertainment has trended up slightly since 2007 and the other divisions are doing well. There is a lot to be hopeful for going forward (growth in consumer cloud services like Xbox LIVE and Bing, Kinect, Windows7, Azure, etc). They may not come close to rivals Apple (AAPL) and Google (GOOG), but they don't need to. Considering the P/E, all they need to do is to trend upward over time.
No one can predict the future, but my guess is earnings will continue to flatten out considering the volumes we are talking about, but the trend will continue up over time. I'm looking at this investment not as a growth stock, but a value investment. The dividend should continue to rise over time. Bottom line - a P/E of 10+, a yield of about 2.5%, and a rock solid balance sheet all look attractive from a value perspective.
For more financial detail and projections see here.
Disclosure: Long MSFT
