Microsoft: A "shareholder friendly" monopolistic competitor
All numbers are reported in US dollars. Fiscal year ends June 30th.
Share Price: $28.65
Shares Outstanding (fully diluted): 9.38 billion.
Current assets-total liabilities (est. on Sep. 30th, 2007): $13.1 billion.
Estimated 2008 EBITDA: $24.4 billion.
Estimated 2008 year end EV/EBITDA: 10.4X
Microsoft is not resting upon its laurels as the world's largest software company. The firm now appears poised to emerge as a digital gaming leader. I feel that the recent release of "Halo 3" will prove to be a great success and will accelerate Xbox 360 sales throughout 2008.
I further envision accelerating sales of Vista operating systems, a strong rollout of new Microsoft Office products and increased penetration of Windows Live over the next 24 months. This growth, coupled with my expectation for surprising gaming revenues, leads me to believe that EBITDA surprises are possible in fiscal 2008 & 2009.
Microsoft's new product cycle is off to a fast start.
Windows Vista and the new Microsoft Office line should result in 2008 revenue growth of at least 15% when compared to 2007. These products carry operating margins of 78% and 65% respectively. I expect Microsoft to generate EBITDA margins of 40% for 2008. Revenue could touch $58.5 billion.
The declining US dollar will add a kick to top and bottom line results for 2008.
International sales were 39.5% of total revenues for 2007, and have continued to grow as a percentage of total revenues over time. For 2008, I anticipate that international revenues will exceed 41% of total sales. MSFT does hedge currency exposure somewhat. Nevertheless, currency changes may add up to $.05 per share of incremental EBITDA for 2008. Greater contributions from foreign markets appear likely in 2009, provided US dollar weakness persists.
Microsoft continues to aggressively lower its fully diluted outstanding share count.
In the past three fiscal years, Microsoft has repurchased 2.037 billion shares, or more than 20% of the fully diluted outstanding share count.
Management' interest at Microsoft appears to be wholly aligned with existing common shareholders.
Share option awards at Microsoft averaged 1.8% of the diluted share count (per year) since 2004. Many public companies routinely award 3X that percentage to employees and insiders.
The 35 Wall Street analysts who produce research on Microsoft are strangely uniform in their outlook.
According to data supplied by Yahoo Finance, the 2008 EPS estimates lie within just 2.5% of the median. In other words, there appears to be no meaningful variation in any single analyst report throughout Wall Street.
Unless Microsoft actually tells analysts exactly how much revenue, EBITDA, closing year end share counts, currency exchange values and net taxation to expect for 2008, no rational reason exists for 35 separate estimates to be so tightly grouped.
I find this analyst convergence to be both disturbing (is plagiarism rampant on Wall Street?) and intriguing (what will happen to the share price should all analysts increase estimates simultaneously).
Conclusion
I anticipate that EBITDA will increase by almost 20% above the 2007 figure. Microsoft may be selling for roughly 10.4X my 2008 year end EV/EBITDA. At the present price, growth investors and value investors alike, could find Microsoft to be attractive.
Provided that MSFT's revenue and EBITDA for 2008 meet my targets, the entire herd of analysts may be forced to revise estimates. Should all analysts change price targets simultaneously, it might be prudent to own shares of Microsoft beforehand.
I am purchasing shares for both RMG#1 and for my personal accounts.
