Microsoft Corporation Quarterly Valuation – November 2014 $MSFT
Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Highest Dividend Yields Among Undervalued Companies for the Defensive Investor - October 2014. By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how Microsoft Corporation (MSFT) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Microsoft Corporation is engaged in developing, licensing and supporting a range of software products and services. The Company also designs and sells hardware, and delivers online advertising to the customers. 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. Effective July 11, 2014, Microsoft Corp acquired InMage Systems Inc.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 6/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion -Â PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 -Â PASS
- Earnings Stability – positive earnings per share for at least 10 straight years -Â PASS
- Dividend Record – has paid a dividend for at least 10 straight years -Â PASS
- 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 -Â PASS
- Moderate PEmg ratio – PEmg is less than 20 -Â PASS
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 -Â FAIL
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 -Â PASS
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend -Â PASS
- Earnings growth – EPSmg greater than 5 years ago -Â PASS
Valuation Summary
Key Data:
| Recent Price | $47.50 |
| MG Value | $33.85 |
| MG Opinion | Overvalued |
| Value Based on 3% Growth | $36.06 |
| Value Based on 0% Growth | $21.14 |
| Market Implied Growth Rate | 5.30% |
| NCAV | $3.95 |
| PEmg | 19.10 |
| Current Ratio | 2.52 |
| PB Ratio | 4.40 |
Balance Sheet – September 2014
| Current Assets | $112,439,000,000 |
| Current Liabilities | $44,694,000,000 |
| Total Debt | $18,472,000,000 |
| Total Assets | $169,656,000,000 |
| Intangible Assets | $26,774,000,000 |
| Total Liabilities | $79,486,000,000 |
| Outstanding Shares | 8,351,000,000 |
Earnings Per Share
| 2015 (estimate) | $2.47 |
| 2014 | $2.63 |
| 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 |
Earnings Per Share – ModernGraham
| 2015 (estimate) | $2.49 |
| 2014 | $2.46 |
| 2013 | $2.32 |
| 2012 | $2.14 |
| 2011 | $2.12 |
| 2010 | $1.78 |
Dividend History
Conclusion:
Microsoft Corporation qualifies for either the Defensive Investor or the Enterprising Investor.  The Defensive Investor’s only concern is the high PB ratio while the Enterprising Investor has no initial concerns.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and comparing it to other opportunities.  As for a valuation, the company appears to be overvalued after growing its EPSmg (normalized earnings) from $2.12 in 2011 to only an estimated $2.49 for 2015.  This level of demonstrated growth does not support the market’s implied estimate of 5.3% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value below the price.
Be sure to check out previous ModernGraham valuations of Microsoft Corporation (MSFT)Â for a better perspective!
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Microsoft Corporation (MSFT)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
Disclaimer:  The author did not hold a position in Microsoft Corporation (MSFT) or in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.
4 thoughts on “Microsoft Corporation Quarterly Valuation – November 2014 $MSFT”
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Hi Ben!
This is a huge drop in the MG Value over one month. It is surprising how much difference there is in the calculation from 2004 -2014 vs 2005-2015. Do you see this a lot when calculating intrinsic values?
Thanks!
James
James,
There’s often a larger move in the MG Value with the first quarter estimate than is seen in the other quarterly updates. Here, the jump was caused by the substantial increase in EPSmg from $1.78 in 2010 to $2.12 for 2011, in combination with the drop in EPSmg from $2.63 for 2014 to an estimated $2.47. As a result, the demonstrated growth is a bit lower, so the conservative estimate of future growth is lower, and then the MG Value drops a bit.
-Ben
Ben,
You mention in your reply above that the “MG Value drops a bit”. Am I missing something. The MG Value dropped from $49.58 in August of 2014 to $33.85 three months later. That’s a drop of about 1/3rd. That’s more than a bit, at least where I come from. It doesn’t seem to make sense, seeing as how the MG Earnings per share is showing an increase of 3 cents from 2014 to the 2015 estimate.
Thanks for taking a look at this Ben,
Johh
John,
The MG Value is also affected by the estimated growth in EPSmg, which is based on the historical growth over the last five years. Here, the growth shown from 2010 ($1.78) to 2014 ($2.46) is greater than the growth shown from 2011 ($2.12) to the estimated 2015 figure ($2.49). As a result, the estimate used in the valuation is lower, which leads to a lower MG Value. If MSFT had kept up with the expected growth rate, the value would have been more stable.
Hope that helps.
Ben