Today's Buy Opportunity: Microsoft

Welcome to "11 O'Clock Stock." Here at Fool.com, we'll be finding a new great stock at 11 a.m. ET every weekday for 50 days. Better yet, we're so confident in the picks that we're investing $50,000 of the Fool's own money in them! To hear more about the series, click here to see a video from Motley Fool co-founder Tom Gardner. Can't make it at 11 a.m. ET? Come back to Fool.com, and we'll have the article in our Top Stories section 24 hours a day.

Stay on target ... stay on target ...

Cheap stock? Check. Defensible business? Check. Dividends and buybacks? Check. Check.

Despite its much-ballyhooed snafus, Microsoft (Nasdaq: MSFT  ) is a stock that you still have to love. Even in spite of its monopoly-type position in a few key markets, dominance that has led detractors to compare it to an evil empire, a Death Star of software. But profit you can ...

Market Cap

$213 billion

Industry

Software

Revenue (TTM)

$62.5 billion

Earnings (TTM)

$18.8 billion

Cash/Debt

$36.6 billion / $6 billion

Source: Capital IQ, a division of Standard & Poor's, and company filing. TTM = trailing 12 months.

I mean cheap
Buying a stock that's cheap can wipe away a host of investing sins. After all, that's the concept of margin of safety that Warren Buffett, Ben Graham, and other great value investors have preached. And such is the case with Microsoft, which has rarely been as cheap as it is now.

The stock now trades at less than 12 times earnings. If you back out net cash and short-term investments of $37 billion, then it's trading at around 10 times earnings. That's cheap, but how cheap? Using Graham's growth formula, Microsoft's price implies earnings growth of less than 1%. Sure, the software giant's growth has slowed of late, but it still managed annual EPS growth of 13% over the last five years. That is solid.

And do you ever think of installing another operating system or using another word processing or spreadsheet program? That brings me to my second point.

Cheap + dominant = profit
Yes, I know Google (Nasdaq: GOOG  ) and Apple (Nasdaq: AAPL  ) are beating the pants off Mr. Softy when it comes to mobile software, and that's not a great thing. And Google is dominating search, too. And Apple's devices have the fanboys drooling over the next pearl to drop from Steve Jobs' mouth. Devices are another place Microsoft has largely failed, whether it be music devices, Kin, or whatever its brass thumb has touched. It still doesn't matter. Microsoft is like Britney Spears on a bender: Its failures score the headlines, but that bad publicity is testament to its ubiquity in our daily lives. People want to know -- good, bad, or neutral -- what's going on with the world's largest software company.

Microsoft's dominance in operating systems and office software is a wonder to behold. Its Windows and Office divisions generated $24 billion in operating profit last year. The company as a whole generated $25 billion in operating profit last year. (The Server division is quite profitable, too, but it offset losses in other divisions.) Windows has some 90% market share, while its Office software does even better. In the Office space, second-place Adobe (Nasdaq: ADBE  ) has just 4% share, while Google has perhaps 2%. So forget the headlines and focus on these two keys to the company's ongoing success.

And the company has taken numerous steps to secure these strongholds, as we increasingly move into the world of cloud computing.

Microsoft is attempting to make its software the product of choice among small and medium-sized businesses. With its comprehensive set of software, Microsoft can offer discounts to businesses for being an all-Microsoft shop. Not only that, but they've been feverishly working to build ties in between their full set of software solutions.

That's a nice move to fortify its competitive moat, since the tech titan can offer value to customers even as it locks in a monopolistic position. By offering discounts and offering a pretty complete set of solutions, Microsoft makes the switching costs that much more obvious to its customers. If customers go to another competitor, they suffer cost disadvantages. What's the incentive for them to change?

And then there's the fat dividend. And the repurchases.
Microsoft is a slower-growing (not slow-growing) cash cow. While that doesn't exactly excite the momentum investors who want action right now at all costs, there are a lot of advantages to investing in such a large cap. Microsoft just prints cash and returns it to shareholders. It's hard not to like that.

Even in its slower-growing phase, Microsoft has been very generous to investors. It has returned nearly $170 billion in dividends and repurchases in the last 10 years. It still has about $24 billion left on a repurchase authorization, so more money could be flowing shareholders' way soon. And earlier this week, the company announced it was sweetening its dividend by 23%

Even better, the company has indicated that it is optimizing its financing to deliver even greater value to shareholders. It has stated that it could issue as much as $6 billion in debt, which could be used to fund buybacks and repurchases. And given the insanely low interest rates that bond investors are willing to accept from high-quality borrowers such as Johnson & Johnson (NYSE: JNJ  ) , and McDonald's (NYSE: MCD  ) , Microsoft (with its AAA credit rating) should do everything in its power to take advantage of cheap rates. With investors desirous to lend to anything with a pulse, it makes a lot of sense for these large caps to borrow billions even if they don't need it at the moment. Just weeks ago, fellow tech titan IBM (NYSE: IBM  ) used the conditions to get a billion-dollar loan that pays just 1% interest.

The bottom line
Microsoft is making a lot of moves that investors should love. And the market just doesn't seem to care right now. That spells opportunity. And as soon as The Motley Fool's 10-day no-trade rule expires on my mention of Microsoft, I expect to lard up my portfolio with some Microsoft shares. How about you?

Interested in reading more about Microsoft? Add it to My Watchlist, which will find all of our Foolish analysis on this stock.

Previous 11 O'Clock Stock recommendations:

Come back to Fool.com tomorrow for another great stock pick. There's plenty more great stock advice, and you can find video of each day's recommendation as well! The Motley Fool will wait at least 24 hours after this publication before buying shares of Microsoft. To see an FAQ on the "11 O'Clock Stock," click here.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

Jim Royal, Ph.D., owns shares in Microsoft. Google and Microsoft are Motley Fool Inside Value picks. Google is a Rule Breakers recommendation. Apple and Adobe are Stock Advisor picks. Johnson & Johnson is an Income Investor choice. Motley Fool Options has recommended a diagonal call position on Johnson & Johnson. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Apple, Google, Johnson & Johnson, and Microsoft. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (24) | Recommend This Article (41)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 23, 2010, at 11:43 AM, jonkai wrote:

    the only problem with your article, and its a BIG PROBLEM, is that you could have written it nearly word for word last year, and the year before and the year before and the year before, and the year before.... etc... for 12 freaking years... are you starting to get the hint?

    ...

    and if you did write it years ago, people would literally think today, that you cost them 12 years of their time. (which is more valuable than money) along with a whole bunch of money...

    what has changed?

  • Report this Comment On September 23, 2010, at 11:49 AM, Reddrummer wrote:

    jonkai

    Price is what you pay, value is what you get.

    Up until recently, there was no way you could buy this stock at less than 12 times earnings.

  • Report this Comment On September 23, 2010, at 11:51 AM, CPACAPitalist wrote:

    I've been a microsoft fan for years. And I think this article does a great job of pointing out the fact that while microsoft has had its missteps in various markets, its complete dominance of the software industry makes it a perrenial winner. If I had more money to invest I would increase my Microsoft holdings even more because its on sale right now and I don't see it going anywhere but up in the next 5 years, all the while paying dividends and buying back shares.

  • Report this Comment On September 23, 2010, at 12:18 PM, uc22 wrote:

    No matter what the so called tech blogs say, Microsoft continues to dominate the OS, Office and enterprise server market. They continue to grow in the database market. THey are growing in the CRM market. They now have slight growth in search. The key factor though is they appear to finally have it together in the consumer market. Only time will tell but XBOX is really picking up steam. Kinect should gain them some casual gamer fans. WIndows Phone 7 is getting pretty good early reviews so that would be a big switch from earlier WIndows Mobile devices. This stock should pick up some steam in late 2010 early 2011

  • Report this Comment On September 23, 2010, at 1:27 PM, ravens9111 wrote:

    Microsoft needs to get in the cloud computing space. They should be looking to buy a company like CRM, FFIV, or VMW. If they want to grow, they need to buy some of these growing companies.

  • Report this Comment On September 23, 2010, at 1:30 PM, TheDumbMoney wrote:

    jonkai, to echo Redrunner, I'd bet money he wouldn't have written the article 10 or 12 years ago. Why? For one thing, at that time MSFT stock was much more richly appraised, relative to the company's actual earnings. Absent consideration of other factors, the mere movement, or lack of movement, in the stock market's appraisal of a stock (that's all market valuation is) over the course of months or even years is utterly irrelevant to whether one should consider buying it today -- unless one is a momentum trader looking merely to surf perceived waves or troughs.

  • Report this Comment On September 23, 2010, at 2:21 PM, TMFRhino wrote:

    One thing to keep in mind, even though Microsoft has been flat for a decade, they've paid back a lot of capital to shareholders - and will only increase payouts going forward. Once you consider that, it hasn't been a bad stock to hold - despite all the noise about how it's "gone nowhere."

  • Report this Comment On September 23, 2010, at 4:48 PM, lazytype wrote:

    The fact is, Gates himself sold truckload of stocks a few months ago. The company slides downhill more than ever before.

    Huge bloated ship with no direction. Yes it looks cheap and is huge but has no growth potential of any kind

  • Report this Comment On September 24, 2010, at 11:09 AM, jonkai wrote:

    --------------------

    Up until recently, there was no way you could buy this stock at less than 12 times earnings.

    --------------------------

    using earnings for MSFT, is like a child using crayons to do spread sheets... they have faked earnings for 12 years... they used cookie jar accounting, using unearned revenues from years and quarters past to smooth quarters that they were in.... they also used ESO's to pay their employees, a direct and HUGE expense to the shareholders, which was never accounted for in earnings... both things i warned about 11 years ago, and i told people what would happen, and this is exactly what happened, MSFT stock price did collapse, because the market is not fooled for very long...

    using Earnings for MSFT is a fools errand which many analysts were burned on for the last 12 going on 13 years... EVERY SINGLE one has lost money for their clients who followed MSFT earnings... WHY? because they were FALSE earnings, the only way you can track MSFT is real CASH.... REAL shareholder EQUITY.... and both have shown horrific growth, stagnant growth and even decline.

    did you think MSFT has issued debt because they felt like a new adventure? trace their real shareholder Equity for 12 years, and tell us again about "12 times earnings"

    EVERY SINGLE ANALYST has been burned by this... MSFT is literally trading at the SAME EXACT PRICE as it was 12 going on 13 years ago, SPLIT AND DIVIDEND ADJUSTED.... meaning not a single investor has made money in MSFT for 12 freaking years... going on 13....

  • Report this Comment On September 24, 2010, at 11:17 AM, jonkai wrote:

    -------------------------------------------

    One thing to keep in mind, even though Microsoft has been flat for a decade, they've paid back a lot of capital to shareholders -

    -------------------------------------------

    let me get this straight, MSFT has paid out a "dividend" of about 1% to 1.5% depending on the decline of the stock, and didn't even do it for the whole decade, and you think this is something to risk your money for???? hello????

    again, INCLUDING THE DIVIDEND, and the SPECIAL DIVIDEND, EVERY SINGLE SHAREHOLDER who held on to msft, and listened to this same none sense article for 12 years, has lost money in MSFT for 12 years INCLUDING THE DIVIDEND.... hello... again.....

  • Report this Comment On September 24, 2010, at 11:25 AM, jonkai wrote:

    --------------

    I'd bet money he wouldn't have written the article 10 or 12 years ago.

    -------------------

    he may not have written it back then, but there were about a dozen that did to take his place, and did every single year for a freaking decade, the same exact type of article about "domination" and "earnings" and "moat" and "server market" and "office market" and the like... it was laughable, and EVERY SINGLE ONE of them lost money in MSFT..... and anyone foolish enough to listen also lost money...

    again, WHAT HAS CHANGED? besides MSFT taking on debt now to make their dividend payments?

    look at the REAL MSFT, their Shareholder EQUITY.... and tell us again about the "GROWTH" and "DOMINANCE"......

    the Employees of MSFT legally robbed shareholders blind with their ESO scheme, the ESO scheme was milked so much that it literally dried up the cow, and MSFT employees had to change to a new program...

  • Report this Comment On September 24, 2010, at 11:27 AM, TheDumbMoney wrote:

    jonkai, forget about earnings, look at free cash flow growth for the last decade and then get back to me. Compare price/FCF ten years ago to now (down almost 50%). And, assuming everything you say is true (some certainly is), still compare the P/E ten years ago to the P/E now (down by > 50%). Compare the PEG ratio ten years ago to the PEG ratio now. Compare stock options issuance to share buybacks. Look at revenue growth over the last ten years. Try to remember what the premium was on all tech stocks ten or twelve years ago. Also, I can tell you for certain I've made money on MSFT, because I bought during the crisis for under $19/share. I find a crayon works really well on a spreadsheet if you sharpen it enough.

  • Report this Comment On September 24, 2010, at 11:36 AM, jonkai wrote:

    --------------------------

    If I had more money to invest I would increase my Microsoft holdings

    --------------------------

    and you would of had more money, if you didn't have MSFT holdings in the first place. stop falling for the "line" like this article, do some real research, the kind the analyst wont do... actually read their 10Q, and 10K's... they are mind bending, if you understand them. you can tell when a person doesn't know what they are talking about with MSFT, it is when they use earnings directly from MSFT's press releases.

    find out the real meaning of an ESO, and "unearned revenue"... find out why MSFT canceled the ESO program, what they replaced it with... and find out why an ESO program that is so large is devastating to a shareholder (and real earnings). and don't ask a buy side analyst. they are paid to get you to "buy"

    and finally, while this article talked about such and such billions MSFT "returned" to shareholders, find out how many Billions it cost MSFT over the last decade to buy back the ESO program, then compare the two.

    take out the "special dividend" because, while idiots like to quote that in their "return" to shareholders, the stock price literally dropped the EXACT same amount as the "special" dividend. meaning ZERO "return" to the shareholders.

  • Report this Comment On September 24, 2010, at 11:44 AM, jonkai wrote:

    ---------

    look at free cash flow growth

    -------------

    apparently, you didn't look???? lets put it this way, did you really think the stock market was stupid? did you think that market would treat a stock like it has MSFT for a freaking decade, if MSFT did have good REAL "free cash flow"????

    seriously what is the disconnect that you are not seeing here? really go look up "free cash flow" and i mean the REAL free cash flow...

    Billions sounds like a lot, but when you have 10's of billions of shares, it suddenly isn't all that much... WHY WAS THE SHARE COUNT BALLOONING FOR A DECADE?.... why has MSFT literally spent "BILLIONS" buying those same shares back?

    did you forget to figure the "buy back" in in your "free cash flow"????

  • Report this Comment On September 24, 2010, at 11:51 AM, jonkai wrote:

    here is a research project for the "real" investor who wants to invest in MSFT....

    go back 10 years of MSFT filings, and add up the amount of Money MSFT spent on buying back shares, the ACTUAL amount of money... and compare that to the "billions" that MSFT has "returned" to the shareholder....

    now compare todays share count with that of 12 or 13 years or so ago.... anybody hear any bells and whistles going off?

    seriously, did you think the stock market was stupid?

  • Report this Comment On September 24, 2010, at 12:03 PM, jonkai wrote:

    the stock market is not there to give investors money, it is to allocate money usually your "investor's" money into someone else's pocket. if you are dumb enough to let them reach in, then they will gladly take it...

    a company doesn't go public so that it can give out money... it is there to TAKE MONEY.... and there has been a whole industry of "people" who have grown up into this market to facilitate the practice.

    NEVER rest if you are in the market, RESEARCH, learn what those people know... if you go in believing P/E ratios... then you have already lost. the only thing there that is accurate is the "P"... and that changes the next day.

    there are 100 tricks to fake earnings, and these companies have learned them all... it is incredibly rare to find someone running a company that is there to be kind to the world and shareholders... MSFT is not one of them, their employees, many many of them, used to be all sitting around in cubicles waiting for their ESO's to mature so they could retire early. they really did nothing else. the rest simply copied anything that moved... remember the "Zune"??? anyone looking at it, realizes what MSFT is now a days. Will they change? maybe, crisis usually instigates change, and MSFT is not in crisis mode, maybe a few more debt offerings, and dividend raises might induce crisis...

  • Report this Comment On September 24, 2010, at 12:12 PM, TMFRhino wrote:

    jonkai,

    Very convenient how you go back 12-13 years. Your comparison to the tech bubble is ridiculous. By that measure almost every company that was dominant in that inflated era is a dog. For investors who put their money in earlier last decade when valuation came back to Earth, most of the larger tech stocks haven't been world beaters, but adjusted have held their own as decent investments.

  • Report this Comment On September 24, 2010, at 12:27 PM, jonkai wrote:

    yes, a decade here, a decade there... pretty soon..

    come on 13 years for a stock to be stagnant?? pretty convenient? that is what it has been... would you be more happy if it was a round number like 20? because at this rate, MsFT is headed that direction, unless some new CEO changes things.

    I am not talking about the time when MSFT was a real investment, I even invested in MsFT when it was as real company... i'm talking about the time when MSFT accountants started playing games with the books, which started about 14 years ago, but didn't manifest itself for a year or two...

  • Report this Comment On September 24, 2010, at 12:32 PM, jonkai wrote:

    also, I'm not talking about the great bubble of 1999, and 2000, i'm talking about BEFORE the bubble, that is why i put it at 13 years, rather than the decade...

    yes every tech went up in the bubble too much, (led mainly by the same sort of accounting tricks) I'm talking about before the bubble, when MsFT was trading at EXACTLY what it is trading at today, split adjusted and dividend adjusted....

    and investors who invested in MSFT AFTER the bubble have not "held their own" that is the point of this discussion... they have floundered horribly... they bought at again... the exact same price as it is today (actually higher)..... DIVIDEND ADJUSTED.... meaning they have LOST MONEY, BEFORE, DURING, and AFTER the bubble...

  • Report this Comment On September 24, 2010, at 12:53 PM, jonkai wrote:

    let's put it this way, TMFRhino, I am on record for the past 11 years in the TMF MSFT forum, and before when TMF was on AOL, telling People that MSFT investors were in for a a lot of pain, and investors should literally, "run kicking and screaming" away from this stock while the employees were raping the shareholders blind with legal accounting. and that is a direct quote from some decade ago or so from me...

    who was right? me? or you? convenient would be to tell people now about this, what i did was tell people BEFORE IT HAPPENED..... ridiculous would be for someone to say MSFT was a good investment, at ANY TIME just before, during or after the great bubble.... and ridiculous would be to think what i have said about MSFT's accounting over and over again for 11 years had to do with the tech bubble.... AGAIN, I said this 5 years ago, 8 years ago, 2 years ago, 1 year ago... and every year inbetween, and i have been correct, EVERY SINGLE TIME..... it has nothing to do with the tech bubble....

  • Report this Comment On September 25, 2010, at 2:36 PM, TheDumbMoney wrote:

    jonkai, first of all, people at the Fool (http://www.fool.com/portfolios/rulemaker/2000/rulemaker00021... and elsewhere (http://www.usagold.com/gildedopinion/microsoftfraud.html), have been onto this for a long, long time, so stop patting yourself on the back so hard. Second, the type of massive stock options program you rightly decry ended in 2003 (see http://www.seattlepi.com/business/129964_msftstock08ww.html; http://www.microsoft.com/investor/reports/ar04/nonflash/10k_..., nor, frankly, was it fundamentally different from paying high salaries to employees -- in fact, it conferred tax benefits on MSFT that high salaries alone would not have conferred. Third, if you compare MSFT to the S&P and to the Nasdaq Computer Index, you actually do see a strong correlation suggesting broad, prior over-valuation (http://www.microsoft.com/investor/reports/ar09/10k_fr_fin.ht.... Fourth, if you actually take the time to look at diluted earnings per share, you can absolutely see the impact of stock options grants anyway (see http://www.investopedia.com/terms/d/dilutedeps.asphttp://www.... Fifth, relatedly, if you actually take the time to look at Microsoft's diluted earnings per share, versus its non-diluted earnings per share, going back to 2006, you can see this (undiluted/diluted): 2006 -- $1.21/$1/20; 2007 -- $1.44/$1.42; 2008 -- $1.90/$1.87; 2009 -- $1.63/$1.62; 2010 -- $2.13/$2.10. Thus you can see both the minimal amount of recent dilution, as well as the extent to which even diluted earnings per share has been increasing since 2006, with the impact of the recession/crisis thrown in. Moreover, this is not because repurchases have simply offset the potential dilution since 2006. If you can site me some actual websites, spreadsheets, and numbers that tell me why I'm wrong, then great, I'm always happy to stand corrected. Until you do, I will continue to think you are still living in 2000, whereas this is 2010. Time to let go of what is apparently an obsession. And stop using ALLCAPS so much, it's sooo shrill. Anyway, I think I'll go back to my crayons now. Fool on, bud.

  • Report this Comment On September 26, 2010, at 4:21 PM, TheDumbMoney wrote:

    So for some reason none of my frigging links work. Just Google it (or Bing it) all.

  • Report this Comment On September 28, 2010, at 8:50 PM, Sadalmelik wrote:

    so, today Microsoft is a great buy, then why is this giant headline on an email in my mailbox from Motley Fool: "Shocking new video reveals the "$160 billion tsunami" that could wipe out Microsoft -- and hand well-positioned investors untold millions... "

    Is MSFT a buy opportunity, or is it going to be wiped out by the $160 billion tsunami?

  • Report this Comment On October 01, 2010, at 3:43 AM, AmcnFndrs wrote:

    On September 24, 2010, at 12:53 PM, jonkai wrote: i have been correct, EVERY SINGLE TIME..... it has nothing to do with the tech bubble....

    Agree with all you have said. They shareholders have been getting robbed blind and if the lid was lifted deeply on the financails and how they account for the money, there are enronesk issues at play. Like all greedy companies of our time, whistle blowers get kicked to the cube pretty fast, pressured to not make waves and just get along. Worse are the disparate systems where the money lives that have never really come together for a clear picture as in, not even sure they know where all the money is or where it goes when it comes in. Scarry!

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1310028, ~/Articles/ArticleHandler.aspx, 12/22/2014 7:01:42 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement