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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


December 31st 2009 Microsoft
Nasdaq Symbol: MSFT
Industry: Software
Price as of 12/31: $30.48

The technology industry is on a roll. Chips, software, and PC sales have picked up noticeably in the last quarter. The analyst community has warmed up to the techs with many of them falling over themselves to upgrade the sector. This past week industry data pointed to strong demand for notebook PCs in the first half of 2010 and commercial PC sales picking up in the second half of 2010 thanks to the adoption of Windows 7. Dell, Hewlett Packard, and other PC vendors will benefit, but the real beneficiary will be Microsoft. That's why is week we'll the featured the tech titan. Microsoft is not the monopolistic monster it once was thanks to increased competition from the likes of Google and Apple among others. However, Microsoft's line of products is better than ever generating over a billion dollars in free cash flow every month. Besides Windows 7, Microsoft's line up includes their Windows Office applications, video game machine Xbox, and their search engine Bing which is rapidly gaining favor among Internet users. Microsoft is not longer a flashy stock, but 2010 is looking bright the tech firm. This week an analyst at Collins Stewart upgraded the stock with a $36 price target.
A consulting firm, Auriga sees Microsoft in the early stages of material operating and financial improvement, fueled in part by a strong product cycle. The firm notes that data points on Windows 7 sell-through have been very positive since the October 22 release. Moreover, the firm expects Windows 7 will improve client ASPs beginning this quarter and continuing through at least the end of 2010. The current PC unit growth assumptions for next year are conservative, indicative of further potential upside to consensus earnings numbers. The Collins Stewart analyst upgrade of Microsoft is due to a PC shipment recovery & strong Xbox sales. The analyst believes Microsoft's stock does not reflect all the positives of Windows 7 or any upside from Windows Office 2010. They also expect Microsoft to sustain market share gain by Bing, and expect more cost efficiencies with the economic recovery. Another analyst at Caris increased their estimates based on their PC outlook for 2010, which was moderately higher from a unit perspective than their previous assumption. The firm believes it is important to note that this bullish unit outlook is partially predicated on continued aggressive pricing by OEM's, particularly in the consumer segment of the market (ie. Best Buy, Staples, and other). If this is true, Microsoft's numbers could prove to be conservative.
In the last couple of months, the earnings estimates for Microsoft have been ratcheted higher. Currently the stock trades for 14 times earnings, 4 times sales, and 6 times book value. Microsoft has been raising their dividend, but the yield remains below 2%. Microsoft has performed well this year, rising 50%. It will not beat those returns next year, but with the best product portfolio ever, the company and the stock should continue to perform well.