Microsoft (MSFT) continues to be a no-brainer. The firm has robust free cash flow, a rock-solid balance sheet, and significant revenue and earnings growth potential. As we continued to pound the table on shares for much of the past two years—the company is one of the LARGEST weightings in the portfolio of our Dividend Growth Newsletter—others said Microsoft was “dead money” and would continue to be. The firm’s share price hit a six-year high Friday.
Thursday after the close, the software giant exceeded top- and bottom-line expectations in its fiscal first quarter by a significant margin. Revenue jumped 15.8%, while diluted earnings per share leapt nearly 17%. These are staggering growth figures for a firm that is supposed to be a tech dinosaur. CEO Steve Ballmer was quite enthusiastic about the potential for new product releases this fall and spoke positively about Xbox One, Surface, as well as the full spectrum of Windows 8.1 and Windows Phone devices.
Looking at Microsoft’s fortress balance sheet, total cash and short-term investments totaled a massive $80.7 billion at the end of the period. Though many investors care about where the cash is domiciled, we don’t. Business is global, and Microsoft will be able to apply cash in areas of need or issue relevant debt to repatriate cash (as in this example). Net cash from operations was $8.2 billion and capital spending was $1.2 billion during the quarter, resulting in free cash flow of about $7 billion, a whopping 37.6% of sales. It really doesn’t get better than this when it comes to free-cash-flow generation.
Valuentum’s Take
There are two ways that we convey our high-conviction ideas. First, if a firm is included in our Best Ideas portfolio or Dividend Growth portfolio, it is a ‘best idea.’ Second, if a firm is heavily weighted in one of these portfolios, it is one of the best of our ‘best ideas.’ Microsoft is one of the best of our ‘best ideas,’ and it showed why Friday. We’re reiterating our fair value estimate of $47 per share and continue to believe that Microsoft is one of ‘The Cheapest Stocks Over $10 on the Market Today.’ We think the software giant’s positive performance also bodes well for tech bellwether Intel (INTC).