Microsoft- MSFT Jan. 31st, 2003
Prepared by Eric Burns & Jared Thal
UConn Foundation Student Managed Fund
Trade Form
Presentation Date: 01/29/03
Covering managers: Eric Burns, Jared Thal
Anticipated date for trade: 01/30/02
Stock Name: Microsoft Corporation
Ticker: MSFT
Decision: Buy
Number of shares: approximately 150 shares
Approximate cash value: $7500
Limits:
Stop Loss: at $42.00 or 15 % of current price
Appreciation review price target: $60.00
Vote results
for: 11 against: 0 Abstain:
Trade executed by: Professor Ghosh
Trade manager present:
Microsoft- MSFT Jan. 31st, 2003
Prepared by Eric Burns & Jared Thal
MSFT- Executive Summary
After a long endured hiatus, our coveted Microsoft has finally met our buy price.
What with the current line up of Microsoft products paired with both the entrance into
new platforms and services, our only fear is of further anti-trust squabbles in these
new markets. The recent news of a dividend dispersement and stock split has reeked a
bit of havoc onto the market price, thus bringing us to this point of a “fair” market
price. However, given historical precedence, we are faithful that the reduced price
will encourage extended investment and increased liquidity across the market,
thereby increasing the overall market cap. Upon reviewing their historical market
share, a staunch rejection in the use of debt, managerial steadfastness, and their
unprecedented accumulation of cash, Microsoft is the investment to beat.
Microsoft- MSFT Jan. 31st, 2003
Prepared by Eric Burns & Jared Thal
University of Connecticut - Student Managed Fund
Stock Analysis Report
January 29, 2003
Microsoft Corporation - NYSE (MSFT)
Large Cap:
Industry:
Sector:
Valueline:
$305 billion
Technology
Software & Programming
Timeliness:
3
Safety:
2
Technical:
2
Stock Scouter Rating:
8
Business Summary:
Microsoft Corporation develops, manufactures, licenses and supports a wide
range of software products for a multitude of computing devices. The Company's
software products include scalable operating systems for servers, personal
computers (PCs) and intelligent devices; server applications for client/server
environments; information worker productivity applications; business solutions
applications, and software development tools. During the year ended June 30,
2002, Microsoft launched Xbox, its next-generation video game system. The
Company's online efforts include the MSN network of Internet products and
services and alliances with companies involved with broadband access and
various forms of digital interactivity. Microsoft licenses consumer software
programs, sells hardware devices, provides consulting services and trains and
certifies system integrators and developers.
Microsoft- MSFT Jan. 31st, 2003
Prepared by Eric Burns & Jared Thal
Chart:
RATIO COMPARISON
Valuation Ratios
MSFT
Industry Sector S&P 500
P/E Ratio (TTM)
27.34
30.79
33.11
22.63
P/E High - Last 5 Yrs.
86.12
85.35
65.88
49.17
P/E Low - Last 5 Yrs.
24.52
21.55
19.47
16.56
Beta
1.75
1.89
1.87
1
Price to Sales (TTM)
8.48
6.83
4.15
2.82
Price to Cash Flow (TTM)
27.35
27.95
26.2
16.29
% Owned Institutions
51.72
43.01
46.48
61.92
MSFT maintains price ratios consistent with the market, thus indicative
of reasonable market pricing.
Growth Rates(%)
Sales (TTM) vs TTM 1 Yr. Ago
Sales - 5 Yr. Growth Rate
MSFT
Industry
14.67
8.77
18.9
21.57
Sector S&P 500
3.42
4.52
17.26
10.84
EPS (MRQ) vs Qtr. 1 Yr. Ago
14.11
15.04
33.54
26.91
EPS (TTM) vs TTM 1 Yr. Ago
58.54
39.18
31.54
21.87
EPS - 5 Yr. Growth Rate
16.54
19.92
9.87
9.49
Capital Spending - 5 Yr. Growth Rate
9.06
-1.23
-15.09
-7.89
As you can see, MSFT has a solid foundation of sales growth. Although
Microsoft- MSFT Jan. 31st, 2003
Prepared by Eric Burns & Jared Thal
more modest growth is predicted of the future in relation to the market,
MSFT has established itself as a leading brand and will continue growth
steadily.
Financial Strength
MSFT
Industry Sector S&P 500
Quick Ratio (MRQ)
3.55
2.98
2.4
1.14
Current Ratio (MRQ)
3.89
3.27
2.86
1.66
LT Debt to Equity (MRQ)
0
0.06
0.27
0.74
Total Debt to Equity (MRQ)
0
0.07
0.33
0.99
Profitability Ratios (%)
MSFT
Industry Sector S&P 500
Gross Margin (TTM)
80.52
76.73
51.32
47.38
Gross Margin - 5 Yr. Avg.
84.92
78.21
52.84
47.71
EBITD Margin (TTM)
EBITD - 5 Yr. Avg.
43.79
51.14
32.7
35.73
12.56
20.16
19.73
21.86
Operating Margin (TTM)
43.79
30.76
9.62
17.92
Operating Margin - 5 Yr. Avg.
45.8
29.3
14.75
18.2
Here you can see how MSFT has managed to accumulate such massive
cash flow over the years. It is apparent that, without any debt, the
shareholders receive only further security in their investment.
Management Effectiveness (%)
MSFT
Industry Sector S&P 500
Return On Assets (TTM)
13.87
11.02
3.89
6.2
Return On Assets - 5 Yr. Avg.
19.41
14.54
8.45
7.65
Return On Investment (TTM)
17.01
14.83
6.37
10.05
Return On Investment - 5 Yr. Avg.
24.83
21.93
13.4
12.38
Return On Equity (TTM)
17.84
16.02
8.78
18.4
Return On Equity - 5 Yr. Avg.
26.31
24.5
18.23
21.39
Given the Co-founder’s involvement and current $30 billion stake in the company,
management has achieved consistent market leading achievements in regard to
efficiency. The SMF’s emphasis on ROE is well supported here, retaining a well
regarded stature in our research.
Recent News:
RealCommentary from TheStreet.com
Microsoft's Micro Dividend
Tuesday January 21, 2:42 pm E
By David Peltier, Special to RealMoney.com
Did you hear the good news? Microsoft (NasdaqNM:MSFT - News) has finally decided to pay its
shareholders a dividend. The 8-cent payment will be doled out March 7 to investors who are holders of
record on Feb. 21.
This much-ballyhooed decision has been a long time coming from a company that has amassed an
unprecedented amount of cash over the years -- $43.4 billion at the end of the December quarter, to be exact.
That equates to about $8 per share, or 15% of the company's market value.
Microsoft- MSFT Jan. 31st, 2003
Prepared by Eric Burns & Jared Thal
U.S. judge quashes some Microsoft consumer suits
Monday January 27, 7:23 pm ET
WASHINGTON, Jan 27 (Reuters) - A federal judge on Monday granted a motion by Microsoft Corp.
(NasdaqNM:MSFT - News) to throw out five of the consumer antitrust lawsuits filed against the company in
four states
U.S. District Judge J. Frederick Motz struck down lawsuits filed in Connecticut, Kentucky,
Maryland and Oklahoma, saying laws in those states do not allow consumers to collect damages from
Microsoft unless they purchased software directly from the company.
Most consumers purchase Microsoft's Windows operating system and the its other software through
retailers or get it pre-installed on the computers they buy.
In each of the cases dismissed on Monday, Motz said, state courts have ruled that so-called indirect
purchasers cannot collect damages.
The cases are part of a slew of class-action lawsuits filed against Microsoft on behalf of consumers
in the wake of the government's landmark antitrust case against the company.
The judge is overseeing many of the consumer lawsuits, as well as civil cases filed by Sun
Microsystems Inc. (NasdaqNM:SUNW - News), AOL Time Warner Inc. (NYSE:AOL - News) unit
Netscape Communications, Be Incorporated and Burst.com.
In the class-action cases before Motz, the plaintiffs allege Microsoft abused its monopoly power to
prevent competition in the market for personal computer operating systems, leveraged its Windows
monopoly to obtain monopolies in the markets for word processing and spreadsheet software and used its
monopoly positions in these markets to overcharge purchasers of Windows, Word, Excel and Office
software.
The U.S. Court of Appeals for the District of Columbia, in 2001, reviewed the government suit and
agreed that Microsoft had illegally maintained its monopoly in the Windows computer operating system but
rejected breaking the company in two to prevent future violations.
A settlement of the government suit was endorsed by U.S. District Judge Colleen Kollar-Kotelly in
November, although Massachusetts and West Virginia are appealing.
Tech Chiefs Enter 2003 with Dim Hopes
Sunday January 26, 1:24 pm ET
By Lucas van Grinsven
DAVOS, Switzerland (Reuters) - Technology executives scrambled to tone down expectations for 2003 this
week after hard-learned lessons that their customers cannot predict the future.
From Microsoft's (NasdaqNM:MSFT - News) Bill Gates to Michael Dell, the founder of the world's
second-largest personal computer maker, few were prepared to predict a recovery in global demand for
technology after the Internet bubble burst.
"There's no big uptick," Gates told the World Economic Forum.
"It's OK, but not good," said Dell, Chief Executive of Dell (NasdaqNM:DELL - News).
Many of the chiefs of the world's largest technology companies spent the past days in the Swiss ski
resort, host each year to some 2,000 political and business leaders.
The corridors have been full of talk of war on Iraq and the sluggish U.S. economy. But technology
executives have been taking the pulse of their market, often in back-to-back meetings with customers,
ranging from aircraft manufacturing bosses to the heads of global retail chains.
MSFT Models:
Risk Free Rate:
S&P500 (10 year average return):
Beta: 1.15
4.095%
7.930%
Microsoft- MSFT Jan. 31st, 2003
Prepared by Eric Burns & Jared Thal
1. Required Rate of Return
k=rf +β(rm-rf): 8.50%
Earnings 1994: 0.25
Earnings 2002: 1.87
ge: (1.87/0.25)^(1/9)-1= 25.05%
Average ROE: 26.28% (8 year average)
Average Retention: 1-(27.2%+31.5%+35.1%+30.4%+27.7%+22.7%+21.2%+19.9%)/8 =73.04%
Gr: ROE*retention ratio (b)= 26.28%*.7304= 19.19%
Average g: (22.3%+5.88%+3.89)/3 = 10.69%
k<g
2. P/E Model
Avg P/E ratio 30
Expected EPS (VLIS)= $1.90
5-Year Horizon: 2.85
P/E Ratio: 27.79
Projected high price for the next 5 years: 27.79 * $2.85 = $79.20
Lowest price in the last 3 years: $40.31
Current Price: $47.46
Quartiles
Strong buy: $ 40.31 - $50.03
Weak buy:
$ 50.03 - $59.76
Hold:
$ 59.76 - $69.48
Sell:
$ 69.48 - $79.20
Upside potential:
$79.20-47.46 = $31.74
Downside potential $47.46-40.31 = $7.15
Upside/Downside potential: 4.44
Strong Buy.
3. Valuepro.net
Intrinsic Value
Growth Rate
Risk Free Rate
WACC
65.57
10%
4.095
7.55
Microsoft- MSFT Jan. 31st, 2003
Prepared by Eric Burns & Jared Thal
Value line Model
MSFT: Long Term Debt + Shareholder Equity:
Growth Estimate:
Common Shares Outstanding:
Average Annual P/E Ratio:
Return on Total Capital:
The Future Price: 52,180 * 1.11^10 / 5359 *.20 * 30 =
(Discount the future price at 15% for n=10) =
52,180 (million)
11.0%
5359 (million).
30
20%
$165.90 ($160 - $175)
$41.01 ($39 - $44)
Based on this buy range we are overpaying for Microsoft. However, Microsoft historically sells at a
premium.
Recommendation
Buy 150 shares at
Downside review:
Stop loss:
Upside review:
$ 49.71 = $7456.50
$ 44.00
$ 42.00 (-15%)
$ 60.00 (20%)
Microsoft- MSFT Jan. 31st, 2003
Top Institutional Holders
Prepared by Eric Burns & Jared Thal
Shares %Out*
Value** Reported
FMR Corporation (Fidelity Management &
Research Corp)
206,862,779
3.87 $11,664,992,107 30-Sep-02
Barclays Bank Plc
183,097,231
3.42 $10,324,852,856 30-Sep-02
State Street Corporation
137,288,861
2.57
$7,741,718,871 30-Sep-02
AXA Financial, Inc.
105,687,944
1.98
$5,959,743,162 30-Sep-02
Vanguard Group, Inc. (The)
96,151,471
1.8
$5,421,981,449 30-Sep-02
Taunus Corporation
79,836,524
1.49
$4,501,981,588 30-Sep-02
Mellon Bank, N.A.
59,369,780
1.11
$3,347,861,894 30-Sep-02
JP Morgan Chase & Company
51,871,565
0.97
$2,925,037,550 30-Sep-02
Putnam Investment Management, LLC
50,466,272
0.94
$2,845,793,078 30-Sep-02
Citigroup Inc.
45,701,793
0.85
$2,577,124,107 30-Sep-02
Shares %Out*
Value** Reported
Top Mutual Fund Holders
ABN Amro Model Fd 3
131,356,696
2.46
$7,407,204,087 30-Apr-02
Vanguard Index 500 Fund
45,688,436
0.85
$2,576,370,906 30-Jun-02
Fidelity Magellan Fund Inc
39,822,300
0.74
$2,245,579,497 30-Sep-02
College Retirement Equities Fund-Stock
Account
30,211,354
0.57
$1,703,618,252 30-Jun-02
Erste-Sparinvest Sparinvest Fund
23,046,000
0.43
$1,299,563,940 30-Nov-01
SPDR Trust Series 1
22,118,378
0.41
$1,247,255,335 30-Sep-02
Fidelity Growth & Income Portfolio
21,590,600
0.4
$1,217,493,934
31-Jul-02
Fidelity Otc Portfolio
21,281,200
0.4
$1,200,046,868
31-Jul-02
Vanguard Institutional Index FundInstitutional Index Fd
19,389,909
0.36
Fidelity Growth Company Fund
17,725,000
0.33
Ownership
·
Insider and 5%+ Owners: 17%
·
Over the last 6 months:
· one insider buy; 2,000 shares
· 45 insider sells; 25.1M shares
(2.8% of insider shares)
·
Institutional: 52% (62% of float)
(4,425 institutions)
$1,093,396,968 30-Jun-02
$999,512,750
31-May02
Microsoft- MSFT Jan. 31st, 2003
·
Net Inst. Buying: 100.2M shares (+3.49%)
(prior quarter to latest quarter)
Prepared by Eric Burns & Jared Thal