Microsoft Shares Fading Ahead Of 1Q 2013 Earnings

| About: Microsoft Corporation (MSFT)

By Brendan Gilmartin

Microsoft (MSFT) is scheduled to report 1Q 2013 earnings after the close of trading on Thursday, October 18. Results are typically reported between 4:05 p.m. and 4:15 p.m. EST with a conference call to follow at 5:30 p.m. Aside from the underlying shares, the technology related ETFs (PowerShares (QQQ)/SPDR Technology ETF (XLK)) may also move off the Microsoft report, along with the index futures, provided the announcement precedes the CME scheduled maintenance shutdown at 4:15 p.m. EST.

For 1Q 2013, the estimate is $0.57 (Source: Zacks Investment Research) with revenue reaching $16.486 bln.

Microsoft has not provided earnings or revenue guidance since its 1Q 2009 earnings release.

Selerity recently added a new measure for Microsoft - Effective Tax Rate used to gauge the quality of an earnings release. Therefore, if the company reports a strong EPS figure relative to consensus, but the tax rate has declined Q/Q, Microsoft shares may still sell-off on weak "earnings quality."

A recent earnings warning from PC maker Hewlett Packard (NYSE:HPQ) and weak industry reports have weighed on Microsoft shares in recent weeks. On October 10, Gartner reported that worldwide PC shipments declined 8.3% in the 3Q period, due in part to the transitional period ahead of the Windows 8 rollout. Similarly, IDC reported an 8.6% drop in PC shipments.

Recent News

  • 10/17: MKM Partners lowered its 1Q 2013 forecasts for Microsoft ahead of earnings, according to a post on Barron's. The firm believes 1Q revenues could miss estimates and is targeting $16.209 bln, citing a muted adoption for Windows 8, weaker PC sales, and slower growth in the Windows and Office brands.
  • 10/11: Morgan Stanley reiterated an Overweight rating and a $37 price target on Microsoft, according to a report on Barron's. Despite the softness in the PC sector, the firm sees Microsoft benefiting from a more diversified revenue stream, including a push into the tablet space and growth in the Server & Tools segment, along with the introduction of Windows 8.
  • 09/18: Microsoft raised its quarterly dividend 15% to $0.23 per share, and now yields 3.12%.

Technical Review

Microsoft shares have been slipping ahead of the 1Q 2013 earnings release, dropping more than 6% from the September highs. Despite the weakness, the shares held support at $29.00, while the RSI and MACD are stabilizing from oversold conditions. From here, there is formidable resistance at the 200-Day SMA near $30, followed by the recent high near $31.50 should earnings surprise to the upside. Should earnings disappoint, there is downside risk to $29.00 (chart courtesy of

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Microsoft shares are retreating in advance of the 1Q 2013 earnings release, following a series of unwelcome reports on the fate of the PC segment, a weak outlook from Hewlett Packard, and the transition period ahead of the Windows 8 unveiling later this month. But with the shares off more than 6% from the late September highs and the softness in the PC sector a widely-publicized theme, much of the weakness may be priced in. The shares are now yielding a healthy 3.12%, while benefiting from a more diversified revenue stream, including growth in the Server and Tools segment, leaving it less susceptible to shocks in the PC market.

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.