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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week

Microsoft

April 15th 2011 Microsoft
Nasdaq Symbol: MSFT
Industry: Software
Price as of 4/15: $25.37

Earnings season started this week and hopefully it's not a harbinger for things to come. Alcoa and Google traded sharply lower following earnings. Bank of America and JP Morgan opened higher, but then sold off following earnings. The defensive stocks have perked up of late sending the likes of Altria, Philip Morris, and Kraft to new all time highs. The drug sector is also performing well, but investors won't touch the blue chip tech stocks. Everyone is in love with Apple shunning their rivals, but the risk reward seems to point to the old tech names. Microsoft, Intel, Cisco Systems, Hewlett Packard, and Dell continue to move sideways even though their valuations are compelling. All five are trading for 10 times 2011 earnings and less than 10 times 2012 earnings. In the old days these stocks never paid dividends, but except for Dell they all do now. Intel's yield is 3.7%, Microsoft yield is 2.5%. HP is less than 1% and Cisco Systems announced their first ever dividend with a yield over 1%. Intel reports earnings in the next week setting the table for big cap techs. This week however we'll feature Microsoft. As mutual fund manager Bill Miller said on CNBC last week, the stock is too cheap to ignore. Besides trading for 10 times earnings and yielding over 2.5%, the company also has a war chest of $40 billion or $5 a share to do anything they wish. That's a big advantage for any blue chip company looking to turn around business and get their stock moving in the right direction once again.

Microsoft won't report earnings until the last week of April, but the earnings should continue to power higher. Besides churning out a billion dollars in free cash flow from their Windows operating software, the company's Bing search engine and X-box continue to grow their business adding to the bottom line. If there is anyone like me, the X-box Kinect motion-sensing technology is amazing. My six year old loves the games and my 2 year old loves watching his older brother play the games. This kinect motion sensing technology has far reaching applications beyond video games enabling its' natural user interfaces to be used for business, medical and other applications. For example, it is not hard to imagine this technology being harnessed to provide a remote monitoring and feedback program for remote physical rehabilitation, among a myriad of other uses.
Thanks to their partnership with Yahoo, Microsoft's Bing interface is more aesthetically pleasing with results that are getting better and better. The latest numbers show both Bing and Yahoo Search have an over 80% success rate in generating clicks on a search result, while Google's success rate is around 66%. It is not hard to see Microsoft controlling over 35% of the market by year end enabling them to charge more for advertising. If it achieves 50% at one point in the near future which is not out of the question, Microsoft could become a powerhouse in the search business.

Even with these improving business segments, Microsoft's stock remains very cheap. As mentioned the stock trades for 10 times earnings and 9 times next years' earnings. The company will go ex-dividend again in the next month for a yield of 2.5%. And with over $40 billion in cash and growing, you can never count out a onetime dividend on top of the yearly dividend. Microsoft is not a flashy stock, but with recent weakness in rivals Apple and Google, it looks like a better risk reward in the short term with attractive long term fundamentals.