MSFT Stock Report

2-Year Price History

Ockham’s Rating

MSFT Stock Evaluation

Looking at MSFT since last week, there has been little movement in price on a percentage basis. Additionally, there haven’t been significant revisions to earnings estimates for MSFT. Given this, we are maintaining our Undervalued rating. While there may not have been any meaningful changes in either price or earnings outlook, we still want to analyze where MSFT is in relationship to its historical fundamentals. Looking at the ratios and multiples described below and throughout this report is the best way to evaluate the strength of MSFT’s current Undervalued rating.

MSFT Revenue

As a value investing shop, we are interested in seeing how MSFT’s revenues measure up against past performances. One easily understandable way of doing that is to compare Price to Sales per share levels over a given time frame. Assuming it is available, Ockham prefers to look at ten years of history (for this stock there are 10 years of history available) and we weigh recent years more heavily. This allows us to find weighted average historical high and low Price to Sales ratios, which give us a better idea of the stock’s current underlying value. Using this method, we have established a high range for Price to Sales of 6.95x and the low end of the range at 4.82x.

With respect to these historically rational metrics, notice that the current Price to Sales per share ratio for MSFT of 2.93x is well below its normal historic Price to Sales levels. At a price of $23.37, MSFT is 51% below where we would expect to see it. Clearly, this stock looks undervalued compared to historical levels, at least on a Price to Sales basis. This will positively affect our analysis because it is rare to find a stock this far below historical norms, and we would expect some price appreciation to bring this metric back towards a more normal range.

MSFT Cash Earnings

As the old saying goes, "Cash is King!" However, we prefer to capture a few other items within our analysis to identify "cash earnings". Nevertheless, an analysis of Cash Earnings is absolutely pivotal to assessing a company’s value, and currently MSFT is significantly below its historical average multiple of Cash Earnings. Looking at the last 10 years we can get a good understanding of what investors have grown to expect from MSFT. For example, MSFT’s Cash Earnings ratio per share has fluctuated between 15.63 and 22.45 over this historical timeframe. This range is based upon a proprietary weighted methodology at Ockham, but can clearly show an investor where MSFT is with respect to prior business periods.

So with MSFT’s current price (latest close of $23.37) and most recent level of Cash Earnings reported, we see significant opportunity from a value perspective. At its current price level, MSFT is 41% below its average level of Price to Cash Earnings on a historical basis. This means that investors were willing to pay for a much higher stock price than currently for the same level of Cash in the past, on a relative basis. There are a couple of important things to remember, however. First, value doesn’t exist in a vacuum. So if the market doesn’t recognize this value, even a great disparity in Price to Cash Earnings cannot force an immediate stock price reaction. Second, patience is key when looking at securities that have reached these levels of Price to Cash Earnings versus their historical norms. So be patient with MSFT.

MSFT Dividends

While it is not necessary to pay an attractive dividend or a dividend at all, to receive a positive rating from Ockham, we view dividends as an additionally helpful measure in determining the future potential of any company.

In MSFT’s case, the estimated annual dividend is $0.52 resulting in a current dividend yield of 2.23%. Similar to our review of Sales and Cash Earnings per share, we evaluate dividend yields from MSFT against the historic high and low levels over the past 10 years. The highest dividend yield from MSFT over this period was 3.50% while the lowest dividend yield was 0.00% MSFT’s current dividend yield is therefore significantly higher than its median dividend yield historically. In fact, the current yield is 27.43% above the median which weighs very positively on our analysis of MSFT.