STOCK ANALYSISSecurities Analysis FI560Fall 20119/4/2011Jcdream4u@yahoo.comJCeretonCOURSE PROJECT: MSFT STOCK ANALYSIS   P...
Company Background       Microsoft Corporation develops, manufactures, licenses, and supports a range of softwareproducts ...
Having a greater than 20%, Microsoft ROE (40.55%) meets the criteria often looked for bygrowth investors.In general, the h...
mbvArgumentsKey Negative ArgumentsLong-Term Strategy – MSFT is planning to investheavily to improve its long-term growth p...
Growth Rate of EarninsJCeretonCOURSE PROJECT: MSFT STOCK ANALYSIS          Page 4
References(Bodie, Zvi. Essentials of Investments, 8th Edition.McGraw-Hill Learning Solutions, 2010. p.       407).http://w...
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J cereton securities analysis project (final) msft

  1. 1. STOCK ANALYSISSecurities Analysis FI560Fall 20119/4/2011Jcdream4u@yahoo.comJCeretonCOURSE PROJECT: MSFT STOCK ANALYSIS Page 0
  2. 2. Company Background Microsoft Corporation develops, manufactures, licenses, and supports a range of softwareproducts and services for various computing devices worldwide.There are five segments namely,(1) Windows & Windows Live Division (Windows Division), (2) Server and Tools, (3) OnlineServices Division (OSD), (4) Microsoft Business Division (MBD), and (5) Entertainment andDevices Division (EDD). Microsoft was founded in 1975 and is headquartered in Redmond,Washington (Yahoo! Finance, 2011).The software giants recent history is almost a small-scaleversion of the U.S. economy. At the end of the 20th century, it was the worlds biggest techcompany but since then it has experience sluggish growth and flat shares. The progression ofMicrosoft through its life cycle demonstrates the relationship between dividends and growth.During its high growth period, it paid no dividends but reinvested all earnings to fuel furthergrowth (July 2004).So, instead of rewarding shareholders through capital appreciation, thecompany began to use dividends and share buybacks as a way of keeping investors interested.Despite massive spending on new ventures, little has worked but Microsoft’s Windows andOffice software remain cash cows.In October 2011, Microsoft acquired Skype Global S.ar.l. Analysis of Return on Equity and Future Growth Rate 2011 2010 2009 2008 2007 Net income 23150 18760 14569 17681 14065 Equity 57083 46175 39558 36286 31097 Return on equity 40.55% 40.63% 36.83% 48.73% 45.23% Return on equity 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% 2011 2010 2009 2008 2007JCeretonCOURSE PROJECT: MSFT STOCK ANALYSIS Page 1
  3. 3. Having a greater than 20%, Microsoft ROE (40.55%) meets the criteria often looked for bygrowth investors.In general, the higher a company’s return on equity compared to its industry(31.60%), the betterin this case. Many analysts look for at least 15% when evaluating investmentcandidates because a firm with a 10 percent ROE cannot grow earnings faster than 10 percentannually. Somany investors look to the company’s return on equity to gauge its growth potential.Microsoft has a 44.8% annual compounded growth rate which is an indicator that they will havean impressive future. Forecast Earnings Growth Source: NASDAQ.com, 2011. Analysis of Required Rate of Return Using CAPM (MSFT) a Redmond, Washington-based Corporation (MSFT) is the largest softwarevendor in the world, founded in 1975 by Bill Gates and Paul Allen. The analysts have identifiedthe following key issues for evaluating the investment merits of MSFT:Key PositiveJCeretonCOURSE PROJECT: MSFT STOCK ANALYSIS Page 2
  4. 4. mbvArgumentsKey Negative ArgumentsLong-Term Strategy – MSFT is planning to investheavily to improve its long-term growth prospects, particularly to capture the fast-growing onlinemarket opportunity.Unearned Revenue – The analysts believe an increasingly strong unearnedrevenue balance provides visibility on revenue growth in the coming quarters.Management –Management follows a well-defined strategy of devolving leadership in the future.StrongBalance Sheet – In spite of share buybacks and payment of substantial dividends, MSFTcontinues to generate strong positive cash flow.Margin Pressure – MSFT’s investment toimprove its competitive position is expected to weigh down on near-term margins and earnings,as R&D and marketing expenses increase.Stiff Competition – Microsoft faces stiff competitionon multiple fronts – from Google in the Internet content/advertising/search sectors, from Sony inthe video game console sector, and from major technology companies that have embraced theLinux operating system.Risks Facing New Product Launches – New product launches could besusceptible to cost overruns and/or weaker-than-expected demand.Earnings Growth is the measure of year on year earnings per share (EPS) growth from the priorfiscal year, expressed as a percentage.Read more: http://www.nasdaq.com/symbol/msft/analyst-research#ixzz1bfSE8DIlJCeretonCOURSE PROJECT: MSFT STOCK ANALYSIS Page 3
  5. 5. Growth Rate of EarninsJCeretonCOURSE PROJECT: MSFT STOCK ANALYSIS Page 4
  6. 6. References(Bodie, Zvi. Essentials of Investments, 8th Edition.McGraw-Hill Learning Solutions, 2010. p. 407).http://www.microsoft.com/investor/reports/ar10/10k_fr_dis.htmlhttp://www.microsoft.com/investor/reports/ar11/financial_review/discussion_analysis.htmlhttp://www.moneychimp.com/articles/valuation/dcf.htmhttp://www.intrinsicvaluecalc.com/index.phpRead more: http://www.nasdaq.com/symbol/msft/earnings-growth#ixzz1bhGjvfvGJCeretonCOURSE PROJECT: MSFT STOCK ANALYSIS Page 5

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