26 December 2012
At UGC, we love buying quality companies that dominate their market and produce huge cash flows, BUT we especially LOVE buying these companies when they are dirt CHEAP!!
So after more than a decade of being in the wilderness, is it finally time to consider one of the most well-known world dominators for a place in your portfolio?
Microsoft Corporation (NASD: MSFT), as many of you would know, develops, licences and supports software products and services and designs and sells hardware. The company’s Windows suite of operating systems and office software applications dominate the market place. But over the past 12 years, investors have grown to hate this company, or at the very least, have forgotten all about it. So today we take a look at this company and investigate whether that is all about to change.
Today, Microsoft’s most famous product, the Windows operating system, still controls 90% of the PC operating market. As gun value investor, Dan Ferris, recently said, this means it is “9 times bigger than all of its competitors combined!” Its suite of office software contained in Microsoft Office products which includes Word, Power Point and Excel are still used more widely than any other office software product in the world and still generate huge sums of money for the company, year in year out.
While many investors have criticised Microsoft for missing, or at least, being late to the party for major trends in cell phones, social networking, search engines and mobile computing, what it appears many have grossly overlooked, in recent times, is Microsoft’s
ability to continually generate huge sums of cash. For almost 13 years now, Microsoft’s share price has gone almost nowhere and today it still trades some 50% below its 1999 all-time high of almost $54 per share.
But despite missing some of the biggest theme’s in tech over the past decade, because of its dominance in its two biggest product markets, it has been able to increase revenue each year for the past 20 years bar one, being 2009, and we all know what happened back then. And even so, that year only saw a meagre decline in revenue of 3.2% before 2010 turned in a result surpassing all others before it. The fact is, Microsoft’s products are so ingrained in our way of life and the way we do business that almost every challenger has had little to no success when attempting to seriously compete in these categories.
But in the end, the facts are the facts.
Despite Microsoft’s lifeless share price for the past 13 years, Microsoft’s sales have increased from $19.7 billion in 1999 to an all-time high of $73.7 billion in 2012. That’s almost 4 times higher than where it was in 1999. In 2011, adjusted earnings per share had grown to $2.69 from $0.71 in 1999, or in other words, it too is almost 4 times higher than when the share price was trading at almost twice the price. And despite a once-off non-cash write down this year, Microsoft’s earnings per share is still 2.8 times higher. All up this means Microsoft has been able to continually raise prices, increase sales, maintain margins and grow cash earnings. It takes a special company to be able to do all these things every year without fail.
And what about it’s dividend? Well Microsoft’s dividend has grown every year since it started paying a dividend in 2003, but it hasn’t just grown, it has skyrocketed by almost 29% on average each year since it started paying a dividend.
What about the company’s financial strength? Well on that count it stacks up on almost all measures as well. According to Yahoo Finance, Microsoft has a net debt to equity ratio of just 19%. Compared to its free cash flow of $24.4 billion, that means Microsoft
could pay off its entire $12.8 billion in debt in almost 6 months from just its free cash flow. Add to that the company’s $66 billion cash hoard and all of a sudden you can see that this company is almost a financial fortress.
In terms of profitability, for every dollar of equity that it has on its balance sheet, the company produces 27 cents of profit. Compare that to your bank account earning 4.5%.
Today, however, given the hype around other well-known stocks in the sector, Microsoft is unloved. BUT, if you look at this chart below, that all might be about to change.
You see, since the all-time high in 1999, Microsoft has been in a consolidation pattern for the best part of 13 years and it has been creating a long term bull flag pattern. This is a pattern which often develops for a period of time after a long period of strong price appreciation. As the market is a fractal, these patterns occur over numerous different time periods and at varying degrees of scale.
Microsoft’s bull flag pattern is huge, in relative terms, and has been developing for 12 years. In general, the longer a company’s share price corrects, the more energy it builds up before its next big move higher. If Microsoft’s pattern is telling us anything, it’s probably telling us that it has a lot of energy to expel. What’s more, over the past few months, Microsoft has begun to break out of its consolidation pattern and after a brief spurt to the upside, now appears to be re-testing support for the upside breakout. Should support be found on the top side of this pattern, this bodes very well for the commencement of the next bull leg in Microsoft, a phase which could easily last for at least as long the corrective phase we have just witnessed.
Today with the company trading for just 8.4x its consensus forecast earnings and on an historical free cash flow multiple of just 9.4x, maybe it’s time you considered broadening your investment horizon by looking at the opportunities being created in direct equity markets outside of Australia.
For information on how you can take advantage of some of the world’s best investment opportunities, contact UGC for a No Cost, No Obligation consultation today.