ModernGraham Valuation: Microsoft Corp (MSFT)


Company Profile (obtained from Google Finance): Microsoft Corporation is engaged in developing, licensing and supporting a range of software products and services. The Company operates in five segments: Windows & Windows Live Division (Windows Division), Server and Tools, Online Services Division (OSD), Microsoft Business Division (MBD), and Entertainment and Devices Division (EDD). The Company’s products include operating systems for personal computers (PCs), servers, phones, and other intelligent devices; server applications for distributed computing environments; productivity applications; business solution applications; desktop and server management tools; software development tools; video games, and online advertising. It also designs and sells hardware, including the Xbox 360 gaming and entertainment console. In September 2013, Ericsson completed the acquisition of Microsoft’s Mediaroom business and TV solution. Effective October 23, 2013, Microsoft Corp acquired Apiphany Inc.

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 6/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
  6. Moderate PEmg ratio – PEmg is less than 20 – PASS
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL


Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary (explanation of the ModernGraham valuation model):

Key Data:

MG Value $47.74
MG Opinion Fairly Valued
Value Based on 3% Growth $35.28
Value Based on 0% Growth $20.68
Market Implied Growth Rate 3.47%
NCAV $4.64
PEmg 15.45
Current Ratio 2.87
PB Ratio 3.84

Balance Sheet – 9/30/2013 (an Introduction to the Balance Sheet)

Current Assets $99,450,000,000
Current Liabilities $34,623,000,000
Total Debt $12,632,000,000
Total Assets $142,348,000,000
Intangible Assets $17,649,000,000
Total Liabilities $60,707,000,000
Outstanding Shares 8,346,000,000


Earnings Per Share – Diluted

2014 (estimate) $2.54
2013 $2.58
2012 $2.00
2011 $2.69
2010 $2.10
2009 $1.62
2008 $1.87
2007 $1.42
2006 $1.20
2005 $1.12
2004 $0.75
2003 $0.69

Earnings Per Share – Modern Graham

2014 (estimate) $2.43
2013 $2.32
2012 $2.14
2011 $2.12
2010 $1.78
2009 $1.56


Microsoft is an intriguing and strong company that may be suitable for either the Defensive Investor or the Enterprising Investor.  The company passes all of the preliminary requirements for these types of Intelligent Investors, with strong financials and stable earnings growth.  Microsoft’s EPSmg (normalized earnings) have grown every year at least as far back as ModernGraham has tracked, which is 2003.  From a valuation standpoint, the ModernGraham model estimates that the company is currently fairly valued by the market because the price is currently trading within the model’s margin of safety regarding the intrinsic value.  Any Intelligent Investor considering purchasing shares of Microsoft should proceed with further research to determine whether the opportunity is right.

What do you think?  Is Microsoft fairly valued?  Should the company only be considered suitable for Defensive and Enterprising Investors?  Leave a comment or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author did not hold a position in Microsoft at the time of publication and had no intention of purchasing a position in the next 72 hours.

Photo Credit:  Andrew Magill

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