Microsoft's Transformation Is Underappreciated By The Market

Jun. 5.12 | About: Microsoft Corporation (MSFT)

Microsoft (NASDAQ:MSFT) continues to be core position in my portfolio. Although it has done well since I picked up shares last year when it was trading under $25 and it has outperformed the overall market during the pullback of the last two months, I don't believe investors are giving the company its due for its transformation and for some of its catalysts and new products.

Positive news/catalysts for Microsoft:

  • Despite all the anticipation/hype around Apple (NASDAQ:AAPL) and its possible new entry into the television market, it is Microsoft that already has made substantial headway into becoming the at-home entertainment portal. It now has 67 million Xbox 360 video-game consoles in homes, of which 40 million are Xbox live members.
  • Nokia's (NYSE:NOK) Lumia phones, which use a Windows operating system, continue to sell well. Look for Microsoft to expand its market share in the smartphone space as Asian handset makers roll out new products and it captures some sales from an imploding Research In Motion (RIMM).
  • Windows 8 is still on track for a rollout later this year, and the stock should get a pop from this much anticipated launch.
  • Learning from Research In Motion and its previous forays, Microsoft is pulling out all the stops to ensure the new operating systems will have tens of thousands of apps and support from the development community.

Four additional reasons to pick up Microsoft at under $29 a share:

  • After the recent market sell-off, Microsoft is yielding close to 3% again (2.8%). It also has a triple A-rated balance sheet and has consistently raised dividend payouts over recent years.
  • The stock is selling near the bottom of its five-year valuation range based on P/E, P/B, P/S and P/CF.
  • Consensus earnings estimates for FY 2013 have gone up 2% over the past two months, despite the downturn in the market. Microsoft now sells for just over nine times forward earnings, quite a bit less if you strip out net cash.
  • The median analysts' price target on the stock is $36 by the 30 analysts who cover the stock. Credit Suisse has an "outperform" rating and a $38 price target on the stock.

Disclosure: I am long AAPL, MSFT.