MSFT Stock Evaluation

Because of a relatively quiet week from a price movement perspective, there has been little change in the valuation of MSFT recently. Furthermore, there has been no change to the earnings guidance given by the company's management in the last week. Those are two key factors in our fundamental analysis which are unchanged since our last report. In accordance with these static factors, we see no catalyst for a ratings change this week.

Recommendation Summary

MSFT Revenue

As a value investing shop, we are interested in seeing how MSFT's revenues measure up against past performances. One easily understandable way of doing that is to compare Price to Sales per share levels over a given time frame. Assuming it is available, Ockham prefers to look at ten years of history (for this stock there are 10 years of history available) and we weigh recent years more heavily. This allows us to find weighted average historical high and low Price to Sales ratios, which give us a better idea of the stock's current underlying value. Using this method, we have established a high range for Price to Sales of 6.02x and the low end of the range at 4.27x.

With respect to these historically rational metrics, notice that the current Price to Sales per share ratio for MSFT of 3.83x is well below its normal historic Price to Sales levels. At a price of 26.03, MSFT is 26% below where we would expect to see it. Clearly, this stock looks undervalued compared to historical levels, at least on a Price to Sales basis. This will positively affect our analysis because it is rare to find a stock this far below historical norms, and we would expect some price appreciation to bring this metric back towards a more normal range.

MSFT Cash Earnings

Cash Earnings is always one of the most important factors to review for a company and, more importantly, an investment in a stock. MSFT is significantly below its historical average multiple of Cash Earnings. Looking at the last 10 years we can get a good understanding of what investors have grown to expect from MSFT. For example, MSFT's Cash Earnings ratio per share has fluctuated between 15.75 and 22.27 over this historical timeframe. This range is based upon a proprietary weighted methodology at Ockham, but can clearly show an investor where MSFT is with respect to prior business periods.

So with MSFT's current price (latest close of 26.03) and most recent level of Cash Earnings reported, we see significant opportunity from a value perspective. At its current price level, MSFT is 31% below its average level of Price to Cash Earnings on a historical basis. This means that investors were willing to pay for a much higher stock price than currently for the same level of Cash in the past, on a relative basis. There are a couple of important things to remember, however. First, value doesn't exist in a vacuum. So if the market doesn't recognize this value, even a great disparity in Price to Cash Earnings cannot force an immediate stock price reaction. Second, patience is key when looking at securities that have reached these levels of Price to Cash Earnings versus their historical norms. So be patient with MSFT.

MSFT Dividends

A strong dividend payment history is looked upon as a favorable characteristic on a company’s future and potentially can receive a positive Ockham rating. That being said, we don't require dividend payments for company's whose management has elected to forgo them entirely.

When reviewing dividend yields for MSFT, we compare the historic high and low levels over the past, which is similar to our evaluation of Sales and Cash Earnings per share. Paying a dividend is not necessary for any company, but changes in dividend often can lend clues as to the health of the business. A rising dividend is a strong sign for an established company, as it reflects management's confidence in the company. MSFT’s estimated annual dividend is 0.52 resulting in a current dividend yield of 2.00%. The highest dividend yield from MSFT over recent history was 3.36% while the lowest dividend yield was 0.00%. MSFT’s current dividend yield is therefore significantly higher than its median dividend yield historically. In fact, the current yield is 18.82% above the median which weighs very positively on our analysis of MSFT.