Company ProfileÂ (obtained fromÂ Marketwatch): Microsoft Corp. engages in the provision of developing and marketing software and hardware services. Its products include operating systems for computing devices, servers, phones and intelligent devices. It also offers 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 operates through the following segments: Productivity and Business Processes; Intelligent Cloud; and More Personal Computing. The Productivity and Business Processes segment consists of products and cloud services in portfolio of productivity, communication, and information services. It comprises of office commercial, office consumer, and microsoft dynamics business solutions. The Intelligent Cloud segment offers hybrid server products and cloud services. It comprises of server products and cloud services and enterprise services. The More Personal Computing segment comprises of windows, devices, gaming, and search advertising. The company was founded by William Henry Gates III in 1975 and is headquartered in Redmond, WA.
Downloadable PDF version of this valuation:
Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?
|Defensive Investor; must pass 6 out of the following 7 tests.|
|1. Adequate Size of the Enterprise||Market Cap > $2Bil||$742,638,698,133||Pass|
|2. Sufficiently Strong Financial Condition||Current Ratio > 2||2.89||Pass|
|3. Earnings Stability||Positive EPS for 10 years prior||Pass|
|4. Dividend Record||Dividend Payments for 10 years prior||Pass|
|5. Earnings Growth||Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end||0.94%||Fail|
|6. Moderate PEmg Ratio||PEmg < 20||45.47||Fail|
|7. Moderate Price to Assets||PB Ratio < 2.5 OR PB*PEmg < 50||9.25||Fail|
|Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.|
|1. Sufficiently Strong Financial Condition||Current Ratio > 1.5||2.89||Pass|
|2. Sufficiently Strong Financial Condition||Debt to NCA < 1.1||0.67||Pass|
|3. Earnings Stability||Positive EPS for 5 years prior||Pass|
|4. Dividend Record||Currently Pays Dividend||Pass|
|5. Earnings Growth||EPSmg greater than 5 years ago||Fail|
Stage 2: Determination of Intrinsic Value
|MG Growth Estimate||-2.40%|
|MG Value based on 3% Growth||$30.00|
|MG Value based on 0% Growth||$17.58|
|Market Implied Growth Rate||18.48%|
|% of Intrinsic Value||1231.05%|
Microsoft Corporation is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the insufficient earnings growth over the last ten years, and the high PEmg and PB ratios. The Enterprising Investor is only concerned with the lack of earnings growth over the last five years. As a result, all Enterprising Investors following the ModernGraham approach should feel comfortable proceeding with the analysis.
As for a valuation, the company appears to be Overvalued after seeing its EPSmg (normalized earnings) decline from $2.46 in 2014 to an estimated $2.07 for 2018. This level of demonstrated earnings growth does not support the market’s implied estimate of 18.48% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value below the price.
At the time of valuation, further research into Microsoft Corporation revealed the company was trading above its Graham Number of $18.73. The company pays a dividend of $1.53 per share, for a yield of 1.6% Its PEmg (price over earnings per share – ModernGraham) was 45.47, which was above the industry average of 38.79. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-1.3.
Microsoft Corporation receives an average overall rating in the ModernGraham grading system, scoring a C-.
Stage 3: Information for Further Research
|Net Current Asset Value (NCAV)||-$1.30|
|Number of Consecutive Years of Dividend Growth||15|
|ModernGraham tagged articles||Morningstar|
|Google Finance||MSN Money|
|Yahoo Finance||Seeking Alpha|
Most Recent Balance Sheet Figures
|Balance Sheet Information||12/1/2017|
|Total Current Assets||$167,633,000,000|
|Total Current Liabilities||$58,099,000,000|
|Shares Outstanding (Diluted Average)||7,710,000,000|
Earnings Per Share History
|Next Fiscal Year Estimate||$1.66|
Earnings Per Share – ModernGraham History
|Next Fiscal Year Estimate||$2.07|
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The author did not hold aÂ position in any company mentioned in this articleÂ at the time of publication and had no intention of changing that position within the next 72 hours. Â See my current holdings here. Â This article is not investment advice; any reader should speak to aÂ registeredÂ investment adviser prior to making any investment decisions. Â ModernGraham is not affiliated with the company in any manner. Â Please be sure to review our detailed disclaimer.