Microsoft: The Cash Machine

Software giant Microsoft (NASDAQ:MSFT) is a classic cash machine (or, if you're from the Midwest, a cash cow). Go back 15 years (you can go back further, but I didn't) and you'll see that revenue and earnings increased every year.

So what happened in the third quarter of 2005 (the fiscal year ends in June)? You guessed it. Revenue and earnings increased.

Revenue for the quarter came in slightly below analyst estimates, but it was still up 5%. Net income almost doubled because legal charges (get this!) fell from $2.53 billion in last year's third quarter to $768 million this third quarter. To put that into perspective, this quarter's sales were $9.6 billion and legal charges were still at 8% of revenue (but down from 27.6% last year). It is expensive to fight in court!

All that fighting still left a very comfy cash hoard. After returning $39 billion to shareholders via a $3 special dividend (that alone is more than $32 billion), quarterly dividends, and share repurchases ($3.8 billion so far this year), the company's cash and short-term investments still stand at a mighty $37.6 billion (more than four times this quarter's sales) -- and there is not a dime of debt on the balance sheet.

The future looks bright for the company, too. Guidance for 2006 calls for sales to increase between 8.7% and 10.7%, and earnings per share (ignoring legal charges, but including stock-based compensation expense) to come in between 15.9% and 22.6% higher, compared to current-year estimates. At the high end of guidance, the stock is priced at about 19 times 2006 fiscal year earnings -- a very reasonable price for a premier but aging growth company.

What's ahead? While the upcoming new Xbox may make headlines, and captivate the child in many adults, it is Windows and Office that pay the bills. The 64-bit version of Windows is now available and the long-awaited new version of Windows (code-named Longhorn) is expected in calendar year 2006. The company is also working with SAP (NYSE:SAP) on a 2006 product that will allow Microsoft Office Suite users (a majority of the world) to gain access to SAP applications. So the cash cow is being fed and it's still producing.

Microsoft is a fantastic growth story that has produced gobs of cash for itself and its shareholders. Ah, but not for shareholders over the past five years. The slowdown in the company's growth rate has caused the stock to go, well, nowhere while earnings have steadily risen.

The days of sideways stock movement may finally be coming to an end. The new versions of Windows will help drive computer and application software sales that will, in turn, help drive Windows and Office sales. Oh, and new chips won't hurt either.

Add it up. Microsoft may be down 7.7% over the past 52 weeks, but it's a very healthy company -- and, in my opinion, it's ready for another growth spurt.

Fool contributor W.D. Crotty does not own shares in any of the companies mentioned. Click here to see the Fool's disclosure policy.