Evercore: Office, Server & Tools make Microsoft a buy

Evercore's Kirk Materne, who upgraded Microsoft (MSFT) to Overweight today, thinks the company's Office and Server & Tools divisions are worth a combined $24-$26/share by themselves.

His estimate assigns a P/E of 11-12 to the businesses on 2014E EPS of ~$2.15, factors in a gross margin hit from the shift to cloud services, and is said to include "fairly conservative assumptions" for consumer Office division revenue (~15% of total).

After throwing in $6/share in net cash (30% tax rate assigned to offshore cash), Materne considers downside risk to be "fairly low" for Microsoft in spite of its well-publicized Windows woes. Particularly since Office/S&T revenue streams have largely shifted to subscriptions/annual licenses, and FY13 billings for the divisions respectively rose by 3% and 9% in the face of soft server and consumer PC sales.

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Comments (4)
  • Weighing Machine
    , contributor
    Comments (902) | Send Message
    If they got rid of Ballmer, broke MSFT up, and recapitalized (throw some debt on the cash cows of office/windows) and bought back shares, it's not tough to come up with $60-70/share in value here.
    8 Aug 2013, 11:38 PM Reply Like
  • Matthew Dow
    , contributor
    Comments (616) | Send Message
    This is very similar to my thesis on MSFT, which I have articulated in a few SA articles over the past months. The enterprise focused businesses are doing well, have a large margin of safety, and are essentially worth the entire market cap today. So all in all the company remains a very good value. I would recommend buying in or adding to a position if shares touch down to $30 again.
    9 Aug 2013, 04:21 AM Reply Like
  • Transcripts&10-K's
    , contributor
    Comments (1216) | Send Message
    This isn't even news - this is math for anybody that knows how to read a 10-K (as noted by Matt above, some of us have been saying this for a long time now).


    The real question is, why would the two businesses described (highly stable/sticky customer base, combined mid-high single digit sales growth, and significant cash flow generation) only go for 11-12X earnings, when the S&P 500 multiple is more than 50% above that? In a private transaction, those two businesses would easily be worth 15X trailing earnings - or $32/share.


    Add in $6/share for cash (after taxes) and we're already at $38; by the way, Windows is worth a whole lot more than zero...
    9 Aug 2013, 07:53 AM Reply Like
  • Weighing Machine
    , contributor
    Comments (902) | Send Message
    there is a huge ballmer discount to this stock. literally every key executive has left the company over the past 8 years. also, almost all major new products have been flops. everything except for the actual financial performance (and financial potential) looks bad. great source of opportunity!
    9 Aug 2013, 11:58 AM Reply Like
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