Numbers analysis: Microsoft Corporation (MSFT)

Microsoft develops and licenses consumer and enterprise software. It is known for its Windows operating systems and Office productivity suite. The company is organized into three overarching segments: productivity and business processes (legacy Microsoft Office, cloud-based Office 365, Exchange, SharePoint, Skype, LinkedIn, Dynamics), intelligence cloud (infrastructure- and platform-as-a-service offerings Azure, Windows Server OS, SQL Server), and more personal computing (Windows Client, Xbox, Bing search, display advertising, and Surface laptops, tablets, and desktops). Through acquisitions, Microsoft owns Xamarin, LinkedIn, and GitHub. It reports revenue in product and service and other revenue on its income statement.

Description from www.nordnet.se

Introduction

I’ve been using Microsoft products since my first PC 30 years ago. I still think there is a place for these products even though alternative free products are available. I do want to buy some Microsoft stock. From a technical analysis point of view it does look good here. Is it overvalued from a Rule 1 point of view?

Charts

10 year weekly chart
1 year daily chart

Statistics

The numbers analysis below is the first step in Rule 1 Investing by Phil Town. In his book Rule #1: The Simple Strategy for Successful Investing in Only 15 Minutes a Week! (no affiliate) he writes about his investing philosophy which centers around four key principles he refers to as the Four M’s: Meaning, Moat, Management and Margin of Safety.

The first requirement is an average annual growth rate of at least 10%, the past 10 years, in the ROIC (Return On Invested Capital), Sales, EPS (Earnings Per Share), Equity and Cash Flow. The average 5 year and 1 year growth rates should also be above 10%. High growth rates suggest a sustainable MOAT.

Next step is to analyse the the Four M’s: Meaning, Moat, Management and Margin of Safety.

The aim is to find a fantastic company, with a great track record, to invest in for at least 10 year. The expected average yearly return is at least 15%. This is used in the calculations. With an investment of 100 USD and a yearly return of 15%, 100 USD will have increased to 405 USD in 10 years time because of interest-on-interest or compound interest.

Year20112012201320142015
ROIC42%36%32%26%20%
Sales (MUSD)6994373723778498683393580
EPS (USD)2.6922.582.631.48
Equity (MUSD)5708366363789448978480083
Operational cash flow (MUSD)2699431626288333250229668
P/E
Year20162017201820192020
ROIC22%21%12%26%26%
Sales (MUSD)9115496571110360125843143015
EPS (USD)2.563.252.135.065.76
Equity (MUSD)719978771182718102330118304
Operational cash flow (MUSD)3332539507438845218560675
P/E2423472635

ROIC and P/E numbers are from gurufocus.com. The rest are from macrotrends.com

Compound Annual Growth Rates (CAGR)

10 year5 year1 year
ROIC (average)24%14%12%
Sales Growth Rate39%35%16%
EPS Growth Rate30%30%13%
Equity Growth Rate41%38%31%
Cash Flow Growth Rate28%31%15%

Price calculations

Growth ratesx2AverageMedian P/EAverage between the high and low P/E
P/E16312623.5
Calculated future price in 10 years199385323292
Calculated Price50968173
Margin of Safety (50%)25484137


Current price: 223 USD

Fair value price range: 50 – 96 USD

MoS price range: 25- 48 USD

To be considered for further analysis here, as a growth stock, the requirement is that the 10 year yearly average growth rate is at least 5% in all five categories. They are. ROIC numbers are great and the other growht rates are increasing.

However the fair price calculations suggest that the stock price is far from undervalued. I will revisit Microsoft in the future if I think the price gets undervalued. I do want to add it to my longterm portfolio if it gets on sale.

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