Microsoft Shares Priced For Severe Recession
It is also clear that we are not immune to the effects of the economy. Consumers and businesses have reined in spending, which is affecting PC shipments and IT expenditures.
– Steve Ballmer, Microsoft CEO, in a memo to employees
Microsoft (MSFT) this morning announced a rough 2nd fiscal year quarter (MSFT Earnings Release). Revenues came in at $16.6 billion and EPS was 47 cents a share – both below analyst expectations of $17.1 billion and 49 cents a share.
In addition, they announced a planned net headcount reduction of 2,000-3,000 over the next 18 months, including 1,400 today (they employed 91,000 as of June 30, 2008). They’ll also be implementing other cost cutting measures to reduce expenses in a tough economic environment. They aren’t giving guidance for the second half of the year but said that revenue and earnings will “almost certainly” be lower than last year.
The stock is getting torched, down 10% on pretty good volume. At these levels, shares are already priced for a severe recession.
The stock is trading just above $17 and Microsoft has $2 of net cash and short term investments on its balance sheet. You get the business for $15. They earned $1.88 over the last 4 quarters for a trailing multiple of 8. Even if earnings drop by 10% over the next year, that’s a 9 forward multiple.
That is cheap for the leading company, with essentially a monopoly on operating systems and business software, with a fortress balance sheet, paying a 3% dividend. There just isn’t too much more downside for Microsoft here even given the harsh economic environment.
That’s why I’ve felt since October that stocks are now pricing in a severe recession. Many commentators ridicule the idea that stocks are cheap based on broad measures of P/E on the major indexes. But almost every time I dig in to the fundamentals of a company, I’m impressed by the value now available.
Disclosure: Top Gun has no position in Microsoft (MSFT) shares.