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Microsoft Corporation: cash flow valuation update

|Includes: Microsoft Corporation (MSFT)
Current Price: ~ $26/share
Projected Yield: ~ 3.09%
 
 
Microsoft develops the Windows PC operating system, the Office suite of productivity software, and enterprise server products such as Windows Server and SQL Server. The Windows PC and Office franchises collectively account for nearly 60% of the firm's revenue, and the server and tools business contributes 24%. The firm's other businesses include the Xbox 360 video game console, Bing Internet search, business software, and software for mobile devices.
 
I estimated the firm's WACC today at 10.69% using the Capital Asset Pricing Model and the company's recent SEC filings.
 
 
Recent free cash flows and growth rates:
Year
FCF $Millions
2002
13739
2003
14906
2004
13517
2005
15793
2006
12826
2007
15532
2008
18430
2009
15918
2010
22096
2011
24639

Average Annual Growth FCF: ~ 8%
CAGR FCF: ~ 7%
Consensus Forecast Industry 5-Year Growth: ~ 20% per year
Consensus Forecast Company 5-Year Growth: ~ 10% per year
 
Average FCF over the past 3 years is $20,884 million.  Starting at $20,884 million FCF, assuming the company achieves a 5-year growth rate in FCF of 10% per year, and assuming that after the next five years, the company achieves no growth in FCF or 0% growth per year forever:
 
Discounted Cash Flow Valuation
Year
FCF $Millions
0
20884
1
22972
2
25270
3
27797
4
30576
5
33634
Terminal Value
346106

The firm's future cash flows, discounted at a WACC of 10.69%, give a present value for the entire firm (Debt + Equity) of $310,778 million. If the firm's fair value of debt is estimated at $12,100 million, then the fair value of the firm's equity could be $298,678 million.  $298,678 million / 8380 million outstanding shares is approximately $36 per share and a 20% margin of safety is $29/share.
 
Sources
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.