This document analyzes Microsoft stock. It provides background on the company and its five divisions. It analyzes Microsoft's return on equity between 2007-2011, which has consistently been over 35% indicating potential for strong future growth. The document also examines Microsoft's earnings growth rate of 44.8% annually and provides a forecast of future earnings growth. It calculates Microsoft's required rate of return using the CAPM model. Key risks and strengths for the company are also discussed.

1. STOCK ANALYSIS
Securities Analysis FI560
Fall 2011
9/4/2011
Jcdream4u@yahoo.com
JCeretonCOURSE PROJECT: MSFT STOCK ANALYSIS Page 0

2. Company Background
Microsoft Corporation develops, manufactures, licenses, and supports a range of software
products and services for various computing devices worldwide.There are five segments namely,
(1) Windows & Windows Live Division (Windows Division), (2) Server and Tools, (3) Online
Services Division (OSD), (4) Microsoft Business Division (MBD), and (5) Entertainment and
Devices Division (EDD). Microsoft was founded in 1975 and is headquartered in Redmond,
Washington (Yahoo! Finance, 2011).The software giant's recent history is almost a small-scale
version of the U.S. economy. At the end of the 20th century, it was the world's biggest tech
company but since then it has experience sluggish growth and flat shares. The progression of
Microsoft through its life cycle demonstrates the relationship between dividends and growth.
During its high growth period, it paid no dividends but reinvested all earnings to fuel further
growth (July 2004).So, instead of rewarding shareholders through capital appreciation, the
company began to use dividends and share buybacks as a way of keeping investors interested.
Despite massive spending on new ventures, little has worked but Microsoft’s Windows and
Office software remain cash cows.In October 2011, Microsoft acquired Skype Global S.ar.l.
Analysis of Return on Equity and Future Growth Rate
2011 2010 2009 2008 2007
Net income 23150 18760 14569 17681 14065
Equity 57083 46175 39558 36286 31097
Return on equity 40.55% 40.63% 36.83% 48.73% 45.23%
Return on equity
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
2011 2010 2009 2008 2007
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3. Having a greater than 20%, Microsoft ROE (40.55%) meets the criteria often looked for by
growth investors.In general, the higher a company’s return on equity compared to its industry
(31.60%), the betterin this case. Many analysts look for at least 15% when evaluating investment
candidates because a firm with a 10 percent ROE cannot grow earnings faster than 10 percent
annually. Somany investors look to the company’s return on equity to gauge its growth potential.
Microsoft has a 44.8% annual compounded growth rate which is an indicator that they will have
an impressive future.
Forecast Earnings Growth
Source: NASDAQ.com, 2011.
Analysis of Required Rate of Return Using CAPM
(MSFT) a Redmond, Washington-based Corporation (MSFT) is the largest software
vendor in the world, founded in 1975 by Bill Gates and Paul Allen. The analysts have identified
the following key issues for evaluating the investment merits of MSFT:Key Positive
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4. mbvArgumentsKey Negative ArgumentsLong-Term Strategy – MSFT is planning to invest
heavily to improve its long-term growth prospects, particularly to capture the fast-growing online
market opportunity.Unearned Revenue – The analysts believe an increasingly strong unearned
revenue balance provides visibility on revenue growth in the coming quarters.Management –
Management follows a well-defined strategy of devolving leadership in the future.Strong
Balance Sheet – In spite of share buybacks and payment of substantial dividends, MSFT
continues to generate strong positive cash flow.Margin Pressure – MSFT’s investment to
improve its competitive position is expected to weigh down on near-term margins and earnings,
as R&D and marketing expenses increase.Stiff Competition – Microsoft faces stiff competition
on multiple fronts – from Google in the Internet content/advertising/search sectors, from Sony in
the video game console sector, and from major technology companies that have embraced the
Linux operating system.Risks Facing New Product Launches – New product launches could be
susceptible to cost overruns and/or weaker-than-expected demand.
Earnings Growth is the measure of year on year earnings per share (EPS) growth from the prior
fiscal year, expressed as a percentage.
Read more: http://www.nasdaq.com/symbol/msft/analyst-research#ixzz1bfSE8DIl
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5. Growth Rate of Earnins
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6. References
(Bodie, Zvi. Essentials of Investments, 8th Edition.McGraw-Hill Learning Solutions, 2010. p.
407).
http://www.microsoft.com/investor/reports/ar10/10k_fr_dis.html
http://www.microsoft.com/investor/reports/ar11/financial_review/discussion_analysis.html
http://www.moneychimp.com/articles/valuation/dcf.htm
http://www.intrinsicvaluecalc.com/index.php
Read more: http://www.nasdaq.com/symbol/msft/earnings-growth#ixzz1bhGjvfvG
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