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Microsoft Corporation: Cash Flow Valuation Update

|Includes:Microsoft Corporation (MSFT)

Current Price: ~ $38/share
Yield: ~ 2.44%

Microsoft Corporation is engaged in developing, manufacturing, licensing and supporting software products, services and entertainment, and device hardware products.

Windows

SurfaceXbox Windows Phone 8

Estimated WACC for the firm today is 9.89% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and noted growth rates:

Year FCF $Millions
2004 13517
2005 15793
2006 12826
2007 15532
2008 18430
2009 15918
2010 22096
2011 24639
2012 29321
2013 24576

Average Annual Growth FCF: ~ 8.6%

CAGR FCF: ~ 6.9%
Consensus Forecast Industry 5-Year Growth: ~ 18% per year

Consensus Forecast Company 5-Year Growth: ~ 7% per year

Internal Growth Rate: ~ 12.2%

Sustainable Growth Rate: ~ 24.6%

Scenario 1

  • Start at $24576 million FCF
  • Assume a 5-year growth rate in FCF of 7% per year, then no growth or 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year FCF $Millions
0 24576
1 26296
2 28137
3 30107
4 32214
5 34469
Terminal Value 372954

The firm's future free cash flows, discounted at a WACC of 9.89%, give a present value for the entire firm (Debt + Equity) of $346267 million. If the firm's fair value of debt is estimated at $14600 million, then the fair value of the firm's equity could be $331667 million. $331667 million / 8350 million outstanding shares is approximately $40 per share and a 20% margin of safety is $32/share.

Scenario 2
All else being equal,

  • Assume a 5-year growth rate in FCF of 10.5% per year, then 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year FCF $Millions
0 24576
1 27156
2 30008
3 33159
4 36640
5 40488
Terminal Value 452404
  • Present Value of the entire firm (Debt + Equity): $407272 million
  • Value of Equity: $392672 million or $47/share
  • 20% margin of safety is $38/share

Sources

Morningstar.com

Yahoo! Finance

Microsoft

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

Stocks: MSFT