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Monday August 02, 2010
Microsoft (MSFT): $10 per share in upside?
by Jack Adamo, editor Insiders Plus  Microsoft (MSFT) recently reported net income for the quarter of $4.52 billion, or 52 cents a share, up 53% from 34 cents a share in the same period a year earlier.Revenue jumped 22% to $16 billion. This is in contrast to most companies’ higher earnings based on cost-cutting with only meager, if any, gains in revenue. The company's business division, dominated by its Office suite of applications, saw sales surge on the recent release of a new version of Office. 
The group posted a 15% increase in revenue to $5.25 billion from $4.57 billion a year ago. Thanks to sales of Windows 7, revenue in the Windows division jumped 44% to $4.55 billion. The Server Software group reported a 14% increase in revenue to $4 billion. Revenue also increased in the company's Online Search and Advertising group and in its Entertainment and Devices segment, which includes the Xbox 360 video game system, computer games, mobile phone systems and other products. But both groups reported wider operating losses; so that remains a weak area. The company used $3.8 billion to buy back stock in the last quarter and has $36.8 billion on its balance sheet, which is more -- if my memory serves -- than Berkshire Hathaway had at its peak a few years ago. And that number doesn’t include $9 billion in "unearned revenue" that is carried on Microsoft’s balance sheet as a liability, since it is money received for products and services it hasn’t delivered yet. Despite all this, the stock is selling for 12-times full year earnings of $2.10 and I believe analysts’ estimates of 13% earnings growth next year will noticeably undershoot actual results, since sales of Windows 7 and Office are picking up across the corporate market. Even at 13% growth, however, we have a stock selling for a price/earnings-to-growth ratio of less than one. What more could we want? I think there’s a very good chance the company will raise its dividend this year (The yield is 2% at the current stock price.) and could even pay a larger "special dividend" as it did a few years ago. I view this stock as underpriced by at least $10. Buy Microsoft up to $33. Learn more about this financial newsletter at Jack Adamo's Insiders Plus. |
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