Microsoft’s Stock Is Boring Yet Tempting

With shares of Microsoft Corporation (NASDAQ:MSFT) trading at around $27.88, is MSFT an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

Microsoft_sign_closeupC = Catalyst for the Stock’s Movement

If you invested in Microsoft three years ago, then you have gone absolutely nowhere. The stock is up 0.65 percent over a three-year time frame. At the same time, Microsoft currently yields 3.40 percent. Therefore, you have been making some money with very little downside risk. After all, capital preservation should always be the top priority. If you’re expecting to find news that Microsoft’s stock is going to skyrocket, then you’re in the wrong place. As it’s often stated, owning Microsoft’s stock is like watching paint dry.

Q2 EPS came in at $0.76 versus an expectation of $0.74. Revenue came in at $21.46 billion versus an expectation of $21.54 billion. However, this was an improvement on a year-over-year basis. Microsoft attributes much of its revenue boost to corporate demand. Businesses are upgrading their Windows and server software, and it looks as though Microsoft’s business is changing right before our eyes.

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Sales in the Windows division increased 24 percent to $5.88 billion. However, Windows PC unit sales decreased 6.4 percent. This was the first decline in five years, and it’s not a great sign of things to come. That said, Microsoft has many revenue streams, and it’s a company with exceptional cash flow. There will always be innovation and acquisition opportunities to fuel growth. With Microsoft, it’s never substantial growth, but you almost always know what you’re going to get: slow and steady returns.

Let’s take a look at some important numbers…

E = Equity to Debt Ratio Is Strong

The debt-to-equity ratio and balance sheet for Microsoft are strong.

Debt-To-Equity

Cash

Long-Term Debt

MSFT

0.17

$66.64 Billion

$11.95 Billion

AAPL

0.00

$29.13 Billion

$0

GOOG

0.07

$48.09 Billion

$2.99 Billion

 

T = Technicals on the Stock Chart Are Mixed

Microsoft hasn’t done much during one of the biggest bull markets in history. It almost seems as though the company now lacks motivation to be the best. Microsoft has grossly underperformed Apple Inc. (NASDAQ:AAPL) and Google Inc. (NASDAQ:GOOG) over the past three years.

1 Month

Year-To-Date

1 Year

3 Year

MSFT

-0.04%

1.27%

-5.20%

0.65%

AAPL

-13.89%

-15.83%

7.49%

128.50%

GOOG

6.13%

6.45%

29.62%

36.91%

 

At $27.23, Microsoft is trading above its 50-day SMA, and below its 100-day and 200-day SMA.       

50-Day SMA

27.02

100-Day SMA

28.43

200-Day SMA

29.33

 

E = Earnings Have Been Steady

Earnings had been improving since 2009, but 2012 saw a decline. However, revenue increased in 2012 and it has been increasing since 2009.

2008

2009

2010

2011

2012

Revenue ($)in billions

60.42

58.44

62.48

69.94

73.72

Diluted EPS ($)

1.87

1.62

2.10

2.69

2.00

 

We already know what happened this quarter. Now let’s take a look at previous quarters.  

9/2011

12/2011

3/2012

6/2012

9/2012

Revenue ($)in billions

17.37

20.88

17.41

18.06

16.01

Diluted EPS ($)

0.68

0.78

0.60

-0.06

0.53

 

T = Trends Might Support the Industry

It depends on the industry. Microsoft is seeing increased demand in the corporate sector, which is a plus. On the other hand, Apple and Google are stealing the show with their mobile devices.

Conclusion

Microsoft is a tricky situation. This is a company with great margins, outstanding cash flow, a strong balance sheet, and a 3.40 percent yield. On the other hand, and to the surprise of many, the stock didn’t hold up well during the financial crisis of 2008/2009. Many people feared the worst when the market was hurting, but the real danger is when the market is near all-time highs while the overall economic environment is weak. This is sometimes referred to as irrational exuberance. If the market holds, then you won’t find a steadier investment than Microsoft. Just don’t expect the world when it comes to returns.

Microsoft is a long-term OUTPERFORM.  

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