Tuesday, November 15, 2011

Microsoft (MSFT) 2011 Review

Microsoft (MSFT) is the world’s largest independent developer and seller of computer software products for a wide range of computing devices.

The company has earned between 30-40% return on equity over the last 10 years and has grown its earnings and dividends at a 12%+ pace over the last five years. MSFT was impacted by the recent economic down turn, but is returning to above average earnings growth as a result of:

(1) the introduction of Windows 7 is benefiting from its commanding position in the PC market,

(2) expansion into the mobile space,

(3) Microsoft is taking market share in the server business and is profiting from the enterprise refresh cycle,

(4) the Xbox is growing at an above average pace,

(5) the company recently introduced the Windows Phone 7 and has an agreement with Nokia which offers a huge opportunity,

(6) acquisitions,

(7) the Bing search engine is taking market share.


(1) softness in the core computing market,

(2) intense competition along with lagging sales in the mobile computing market.

MSFT is rated A++ by Value Line, the company has 17% debt to equity ratio and its stock yields 2.5%.

Statistical Summary
Stock Yield Dividend Growth Rate Payout Ratio # Increases Since 2001
MSFT 2.5% 17% 27% 7*
IND 1.3 12** 20 NA

Debt/Equity ROE EPS Down Since 2001 Net Margin Value Line Rating
MSFT 17% 36% 1 31% A++
IND 20 25 NA 26 NA

*MSFT has paid a dividend for only 9 years
** the vast majority of companies in MSFT industry do not pay a dividend


Note: MSFT stock made good initial progress off its March 2009 low, quickly surpassing the down trend off its November 2007 high (red line) and the November 2008 trading high (green line). However, the stock lost considerable momentum and has been in a trading range since January 2010. MSFT is in a long term trading range (the straight blue line is the lower boundary), an intermediate term trading range (the purple line is the lower boundary) and a short term trading range (the purple line is the lower boundary and the brown line is the upper boundary). The wiggly blue line is on balance volume. The Aggressive Growth Portfolio owns a 50% in MSFT. Shares would be Added at $18; the lower boundary of its Sell Half Range is $46.