I do already own the company. But, this is not an invitation to either buy or sell these securities. Do your own research and figure it out for yourself.
It’s hard to
believe that a company such as Microsoft could still be considered a growth story. After all, a thirty-year old company that is
dominant in their industry is usually considered “mature” – a corporation whose
revenues grow incrementally at best. However,
this description does not apply to Microsoft which has had year-to-year top
line growth between 5%-11% since 2010. Buy-side
analysis, however, does not end here. Potential investors should avoid purchasing an
issue when solid growth is not supported by a strong balance sheet or solid
cash flow. Fortunately for potential investors
this tech company has a rock solid balance sheet and continuously strong free
cash flow. One additional factor is the
company’s current dividend yield of 2.889% and five-year history of increasing dividend
growth. When these fundamental factors
are added together, the decision to buy becomes a matter of when and not if. And, as an analysis of the chart shows, the
time to buy is now, as the security is trading about 5 points above is 1-year
low.
Let’s begin our
analysis by looking at their one-year price chart:
Microsoft rallied from May 2015 until early November, when
prices started to slowly move lower.
They consolidated in a triangle pattern from mid-December to
mid-January. Prices broke through
support at the end of January on a disappointing earnings report. Since then, they have been consolidating
between the lower and mid-40s.
At these price
levels, MSFT is slightly under-valued, as shown on this table from Morningstar:
MSFT is slightly under-valued on a PE, price/sales and price
to book level. This gives us room to
move a few points higher which is increased slightly when you consider the
company slightly outperforms their industry peers on ROA, ROE and net
margin.
Let’s turn to
their financials, starting with their balance sheet. Like most tech companies whose primary asset
is intellectual property, this is a beautiful financial document. The current ratio is 2.45 while the quick
ratio is only slightly lower at 2.24.
The company has been
keeping a close eye on receivables, with their percentage of assets dropping
from 15.1% in 2010 to 11.34% in fiscal 2014. They also keep a ton of cash handy; they’re got $85 billion on their
2014 balance sheet, with most of their holdings in short-term securities. Fundamental investors should like that their overall book value has increased from $46.175
billion in 2010 to $89.784 in 2014, which is almost a doubling in five
years. The only “drawback” is their
increased use of long-term debt, which now totals $20.6 billion. But with an interest coverage ratio of 50.8, it’s
difficult to be concerned. The balance
sheet indicates they have ample liquidity and have kept receivables
well-managed. Their near-doubling in
book value over a five year period also indicates they have shareholder
interests at heart. Finally, they most
likely tapped the debt markets to prevent a high tax bill from repatriation of
foreign holdings.
Their cash flow
statement is no less impressive. They’ve
had free cash flow to the firm of between $22 billion and $29 billion over the
last five years giving the company ample financial maneuvering room. This allows them to self-fund most small acquisitions (those
involving both companies and property) if they desire.
And finally, we
have their income statement. As
mentioned in the opening paragraph, the company is growing between 5%-11%/year. They did have a large 5% jump in COGS in
their latest annual statement. They
offered the following explanation in their 10-K: “Cost of revenue increased mainly due to higher volumes of Xbox
consoles and Surface devices sold, and $575 million higher datacenter expenses,
primarily in support of Commercial Cloud revenue growth. Cost of revenue also
increased due to the acquisition of NDS.”
This trend continued in their latest quarterly statement, increasing
COGS by 8.1%. While this is not an
optimal development, it is partially caused by their move into cloud based
computing, which most analysis (myself included) believe will provide solid
growth avenues for the foreseeable future.
In addition, there are continued costs related to the Nokia acquisition,
as they noted in their latest 10-Q: “Cost of revenue increased, mainly due to
the acquisition of NDS.” These increases
should subside in the next 4-6 quarters.
I have to admit
that I have made my fair share of Microsoft jokes, even referring to them as
the evil empire on more than one occasion.
But all kidding aside, it’s hard not to like the company. They have solid revenue growth, a very strong
balance sheet and the company literally prints money. They’ve been increasing their dividend for
the last five years, and have ample cash and potential revenue growth to
continue this practice for the foreseeable future. All these factors add up to a solid company.
