Window of Opportunity

Posted: Oct 17, 2011 12:02 AM

While a lot of talk has centered around Apple Computers recently, there’s another little computer company that investors seem to have forgotten about.

It presents a little window of opportunity here.    

Microsoft Corp. (MSFT, $27.27) is the world’s largest software company, with $70 billion in FY 2011 sales (fiscal year ending June 30).

Standard & Poor’s maintains a “buy” rating on Microsoft stock. “Our buy recommendation is based mostly on valuation. The shares are trading at 8.4X our FY12 EPS estimate, a significant discount to the market and peers. Despite our concern about MSFT’s lack of presence in mobile devices, we believe its core businesses remain solid, reflecting stronger enterprise IT spending, driven by new product introductions, including Office 2010 and SharePoint.We also think Bing, MSFT’s Websearch engine, will gain market share, and we see continued sales momentum for Microsoft Kinect.We see an eventual launch of Windows 8 and potentially higher dividends or stock buybacks as catalysts.” — Standard & Poor’s Research, Oct. 15, 2011

Morgan Stanley made bullish comments last week. “Win 8 and the Metro UI should open up the Windows platform to a broader set of developers and device types, and generate new revenue opportunities for MSFT.” — Morgan Stanley Research, Oct., 14, 2011

Microsoft has a price/earnings ratio (PE) of 9.6, and projected consensus earnings growth of 6%, 9% and 11% for fiscal years 2012 through 2014.  Microsoft’s dividend is 2.93%, and the ex-dividend date is Nov. 15, 2011. The quarterly dividend was increased from $0.16 per share to $0.20 per share beginning this next dividend, payable Dec. 08, 2011.  Microsoft has an S&P credit rating of AAA.

For ten years, MSFT has been trading between $22 and $31, with a few wild swings on each end. But for the most part, MSFT investors have not made money for a decade. The trading range has been narrowing, which is generally a good sign that the stock can climb from here without constantly re-visiting this year’s trading range. And while the stock price fell with the market in August, it bounced right back up — another sign that MSFT stock has potential strength, especially as the broader market recovers.

MSFT stock has traded between $24 and $28 since May, and barring unexpected corporate or general stock market problems, will likely trade $26-$28 in the near future. If I were looking for a window of opportunity, I would consider buying Microsoft at $26, earning a 3% dividend, and waiting for S&P’s target price of $35 to materialize.

Crista Huff, Goodfellow LLC

John Ransom | Create Your Badge

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