Software Stocks

Microsoft Corporation Valuation – November 2018 $MSFT

Company Profile (excerpt from Reuters): Microsoft Corporation, incorporated on September 22, 1993, is a technology company. The Company develops, licenses, and supports a range of software products, services and devices. The Company’s segments include Productivity and Business Processes, Intelligent Cloud and More Personal Computing. The Company’s products include operating systems; cross-device productivity applications; server applications; business solution applications; desktop and server management tools; software development tools; video games, and training and certification of computer system integrators and developers. It also designs, manufactures, and sells devices, including personal computers (PCs), tablets, gaming and entertainment consoles, phones, other intelligent devices, and related accessories, that integrate with its cloud-based offerings. It offers an array of services, including cloud-based solutions that provide customers with software, services, platforms, and content, and it provides solution support and consulting services. It also delivers online advertising to a global audience.

 

Downloadable PDF version of this valuation:

ModernGraham Valuation of MSFT – November 2018 $MSFT

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $786,398,728,564 1 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 2.92 1 Pass
3. Earnings Stability Positive EPS for 10 years prior 1 Pass
4. Dividend Record Dividend Payments for 10 years prior 1 Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 44.48% 1 Pass
6. Moderate PEmg Ratio PEmg < 20 32.62 0 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 9.24 0 Fail
Score 5
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 2.92 1 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 0.65 1 Pass
3. Earnings Stability Positive EPS for 5 years prior 1 Pass
4. Dividend Record Currently Pays Dividend 1 Pass
5. Earnings Growth EPSmg greater than 5 years ago 1 Pass

 

Stage 2: Determination of Intrinsic Value

EPSmg $3.13
MG Growth Estimate 6.80%
MG Value $69.29
Opinion Overvalued
MG Grade C
MG Value based on 3% Growth $45.45
MG Value based on 0% Growth $26.64
Market Implied Growth Rate 12.06%
Current Price $102.24
% of Intrinsic Value 147.55%

Microsoft Corporation is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the high PEmg and PB ratios. The Enterprising Investor has no initial concerns. 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 growing its EPSmg (normalized earnings) from $2.16 in 2015 to an estimated $3.13 for 2019. This level of demonstrated earnings growth does not support the market’s implied estimate of 12.06% 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 $32.77. The company pays a dividend of $1.65 per share, for a yield of 1.6% Its PEmg (price over earnings per share – ModernGraham) was 32.62, which was below the industry average of 54.3, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-0.96.

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) -$0.96
Graham Number $32.77
PEmg 32.62
Current Ratio 2.92
PB Ratio 9.24
Current Dividend $1.65
Dividend Yield 1.61%
Number of Consecutive Years of Dividend Growth 17

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Most Recent Balance Sheet Figures

Balance Sheet Information 9/1/2018
Total Current Assets $164,195,000,000
Total Current Liabilities $56,277,000,000
Long-Term Debt $69,733,000,000
Total Assets $257,619,000,000
Intangible Assets $43,434,000,000
Total Liabilities $171,652,000,000
Shares Outstanding (Diluted Average) 7,766,000,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $4.43
Jun2018 $2.13
Jun2017 $3.25
Jun2016 $2.56
Jun2015 $1.48
Jun2014 $2.63
Jun2013 $2.58
Jun2012 $2.00
Jun2011 $2.69
Jun2010 $2.10
Jun2009 $1.62
Jun2008 $1.87
Jun2007 $1.42
Jun2006 $1.20
Jun2005 $1.12
Jun2004 $0.75
Jun2003 $0.69
Jun2002 $0.48
Jun2001 $0.66
Jun2000 $0.85
Jun1999 $0.71

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $3.13
Jun2018 $2.46
Jun2017 $2.58
Jun2016 $2.25
Jun2015 $2.16
Jun2014 $2.46
Jun2013 $2.32
Jun2012 $2.14
Jun2011 $2.12
Jun2010 $1.78
Jun2009 $1.56
Jun2008 $1.44
Jun2007 $1.16
Jun2006 $0.97
Jun2005 $0.82
Jun2004 $0.67
Jun2003 $0.65

Recommended Reading:

Other ModernGraham posts about the company

Microsoft Corp Valuation – February 2018 $MSFT
Microsoft Corporation Valuation – February 2017 $MSFT
Microsoft Corporation Valuation – August 2016 $MSFT
Microsoft Corp Valuation – February 2016 $MSFT
Microsoft Corporation Valuation – November 2015 Update $MSFT

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Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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