Microsoft Corporation (NASDAQ: MSFT) Going Strong Despite Strong Competition – Q2 FY 2011 Earnings On January 27
Wednesday, January 26, 2011 5:43 PM

The world's largest software maker Microsoft Corporation (NASDAQ: MSFT) will report its second quarter results on January 27, 2011. In the last four quarters ended September 2010, Microsoft's reported EPS exceeded analysts' consensus estimates by margins in the range of 7.10 percent and 25.40 percent.

Microsoft Corporation software products and services include operating systems for personal computers, servers and intelligent devices; server applications for distributed computing environments; information worker productivity applications; business solutions applications; computing applications; software development tools, and video games. It operates in five segments: Windows & Windows Live Division (Windows Division), Server and Tools, Online Services Division, Microsoft Business Division, and Entertainment and Devices Division. The company also designs and sells hardware, including the Xbox 360, the Zune digital music device, and Microsoft's personal computer hardware products. Microsoft Corporation is the world's largest software maker by revenue, with $58.3 billion of revenue in FY 2009.

Microsoft's Q1 FY 2011 results beat analysts' consensus estimates

For the first quarter of FY 2010, Microsoft reported revenue of $16.20 billion, a 25 percent increase from $12.9 billion reported in the same period of FY 2010. Operating income, net income and diluted earnings per share for the quarter were $7.12 billion, $5.41 billion and $0.62 per share, which represented increases of 59 percent, 51 percent and 55 percent, respectively, when compared with the $4.48 billion, 3.57 billion, and $0.40 per share reported in the first quarter of FY 2010. Prior year results reflect the deferral of $1.47 billion of revenue, an impact of $0.12 of diluted earnings per share, relating to the Windows 7 Upgrade Option program and sales of Windows 7 to OEMs and retailers before general availability in October 2009.

Microsoft is involved in many different aspects of technology and computing, hence, the company faces strong competition in various segments from many companies. The main competitor in the operating system segment is Apple Inc. (NASDAQ: AAPL). In the internet service segment, its main competitor is Google Inc. (NASDSAQ: GOOG), and in the gaming segment, the company faces strong competition from Sony Corporation (NYSE: SNE), with its PlayStation series. In the last one year, Apple Inc. has reported earnings of $17.92 per share, on revenues of $76.28 billion. Google has reported earnings of $26.31 per share, on revenues of $29.32 billion. Sony reported earnings of $0.96 per share, on revenues of $88.99 billion. On the other hand, Microsoft reported earnings of $2.32 per share, on revenues of $65.76 billion.

Microsoft stock looks undervalued

In comparison with trailing 12 months statistical data of the Application Software industry, Microsoft has a P/E ratio of 12.23, much lower than the industry's average P/E of 26.18. The P/S ratio of the company is 3.69, compared to industry's P/S ratio of 3.11. The quarterly revenue growth of Microsoft is 25.30 percent, and industry's quarterly revenue growth is at 25 percent.

Analysts' estimates lower Year-over-Year earnings

For the second quarter ending December 31, 2010, analysts' EPS estimates range from a low of $0.63 to a high of $0.73 per share, compared to the consensus estimate of $0.68 or $0.74 per share earned in the year ago same quarter. Analysts' revenue estimates for the second quarter range from a low of $18.52 billion to a high of $19.74 billion, compared to a consensus estimate of $19.14 billion or $19.02 billion reported in the same quarter a year ago. For the quarter ended December 31, 2010, the consensus EPS forecast has been downgraded to the current estimate of $0.68 per share, from $0.69 estimated 60 days ago.

On September 22, 2008, the company's board of directors approved a share repurchase program authorizing up to $40 billion in share repurchases with an expiration date of September 30, 2013. As of June 30, 2010, approximately $23.7 billion remained of the $40 billion approved repurchase amount. On December 15, 2010, Microsoft's board of directors declared quarterly dividend of $0.16 per share on its common stock. The dividend is payable by March 15, 2011. In the last 52 weeks, Microsoft's stock has been trading in the range of $22.73 and $37.58. Considering the company's financials, I expect the EPS for FY 2011 to be $2.50 per share, and EPS for FY 2012 to be $2.70 per share. Based on the EPS estimates, I set a one year target price of $32.50.



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