By Brian Nelson, CFA
If there is any stock that you might think of when you think of Valuentum, it probably is Microsoft (MSFT). The software giant put up fantastic fiscal second-quarter (calendar fourth-quarter) results after the close January 28. Kudos to my University of Chicago Booth School of Business “colleague,” Microsoft CEO Satya Nadella. Things have really taken off since he took the helm in February 2014, “.”
Microsoft is one of the largest holdings in the Dividend Growth Newsletter portfolio, and it has been one of the best-performing equities since registering a high rating on the Valuentum Buying Index. The company also has been the “focus” income idea in nearly every one of Valuentum’s dividend growth presentations, “,” to interested attendees at meetings of the American Association of Individual Investors (AAII) from Cleveland to Silicon Valley and beyond. It hasn’t been a few days since we walked through Microsoft’s discounted cash-flow valuation model in the latest edition of our ‘Financial Analysis Statement’ seminar.
Microsoft beat both revenue and non-GAAP earnings-per-share estimates in the quarter, the latter by nearly 10%, simply a large level of outperformance for a company of Microsoft’s size. On a constant-currency basis, non-GAAP revenue advanced 3% in the period, while the firm “delivered double-digit operating income growth.” Revenue in its ‘Productivity and Business Processes’ and ‘Intelligent Cloud” increased 5% and 11% on a constant-currency basis, respectively, while sales in its ‘Personal Computing’ segment fell 2% after adjusting for currency changes. Management commented favorably about strong holiday momentum by Surface and Xbox.
Through the first six months of the fiscal year, cash flow from operations at Microsoft advanced 12% on a year-over-year basis, to $14.2 billion. Free cash flow came in at $10.8 billion, better than the $9.9 billion mark in the six-month period in last fiscal year, despite increased capital investment. The company’s total cash balance advanced to $102.6 billion, trumping its $44.4 billion long and short-term debt load, good enough for $58.2 billion in net cash (~$7.25 per share). Annualizing Microsoft’s $0.78 earnings-per-share mark in the most recently-reported quarter and backing out the company’s net cash implies Microsoft is trading at less than 15 times earnings on the basis of yesterday’s closing price.
No longer exchanging hands at as large of a discount to intrinsic value as they once had, Microsoft’s shares have converged to our estimate of their intrinsic value, $55 per share, more than double the price at which they were added to the Dividend Growth Newsletter portfolio. The company yields ~2.8%, and its Dividend Cushion ratio remains rock-solid. We’re expecting ongoing strength at the software giant, and we’re inclined to let this winner “run” as we collect dividend payments.