A value investing style can be broadly defined as one that focuses on "underappreciated" stocks. While market attention often gets caught up on the hot names, it's important to remember that popularity is notoriously fickle. As such, the pendulum generally swings back towards out-of-favor stocks over time so long as they have solid fundamentals. Noted value investor Donald Yacktman makes the analogy to a beach ball held underwater that pops back up.
One area where I'm quite bullish despite the general market saying otherwise is "old tech." With all the focus on social media companies and other newbies on the scene, many solid companies have fallen to extremely attractive valuations. I've previously analyzed why I believe Intel (INTC) and Dell (DELL) deserve more investor attention than they're getting. Continuing with that trend, I believe that Microsoft (MSFT) has been significantly underlooked. While Microsoft is largely seen as an "old, uncool" company compared to hot topics like Apple, I strongly believe Microsoft warrants equal investor attention. (See my Editor's Pick article: Apple and the Cult of the Greater Good.)
- Perhaps most importantly, Microsoft's flagship Windows 8 has received generally positive reviews. The integration of a PC and tablet OS is a big plus for developers. For a more detailed look at Windows 8 and the Surface tablet, see this article and this article.
- MSFT's TTM P/E is only 11.12, which is half the software industry average of 22.76. Yet Microsoft's EPS growth over the past 5 years has been 17.52%, which is only a tick worse than the industry average of 18.96%.
- Projected forward 3-5 year EPS gowth, at 15.30%, is statistically the same as the software industry's projected growth of 15.36%.
- As a mature company, MSFT has a very strong balance sheet. Debt/equity, at 19%, is less than the software industry average of 23% -- and the current ratio of 2.83 is also above the industry average of 2.4. MSFT has strong return stats as well: Return on Assets, at 20.92%, is nearly doubly the industry average of 12.62%. Return on Equity on a TTM basis is 37.46%, much higher than the software average of 22.23%.
- Microsoft's protif margin, at 29.34%, is about 50% higher than the software industry average of 20%. Operating margin, at 36%, is similarly higher than the software industry average of 27%.
- MSFT has an $0.80 annual dividend that represents a 2.62% yield at current prices. The dividend has been raised six times since it was introduced in 2004.
- In the last 12 quarters, Microsoft has beat earnings estimates 10 times and met estimates twice -- it did not miss estimates in the past 12 quarters. (Miss/beat defined as +-2% of estimates.)
- Analyst opinion is largely positive on Microsoft. Of 36 firms with current reports on MSFT, 14 have a "strong buy" recommendation, 11 have a "buy" recommendation, 10 have a "hold" recommendation, and only one has a "sell" recommendation. It's worth noting that MSFT is also a conviction holding of Donald Yacktman, representing 6.2% of his Yacktman Focused Fund and 4.85% of his more diversified Yacktman Fund.
- Of 29 analysts with price targets on MSFT, the low price target is $29 and the high is $40. The mean is $35.70, representing 17% upside from current stock prices.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in MSFT over the next 72 hours.
