North America

Earnings Preview: Microsoft Q1 2018 (MSFT)

By: Craig Bowles

Overview

Microsoft, Corp. (MSFT) is slated to report 1Q2018 earnings after the close on Thursday, October 26th. The earnings release is expected at approximately 4:05 p.m. ET with a conference call to follow at 5:30 p.m. that is webcast through Microsoft Investor Relations. A member of the Dow Jones Industrial Average, Microsoft has significant market influence and the potential to impact the broader market gauges.

Outliers & Strategy

Key measures:

  • Adjusted Earnings Per Share (EPS) / Non-GAAP Earnings Per Share (EPS): (If unavailable, GAAP Earnings Per Share (EPS) would be comparable to consensus.) The Street estimate is $0.72 (range $0.68 to $0.76). (Source: Yahoo! Finance) Consensus was $0.78 three months ago.
  • Revenues: Analysts expect an increase of 5.4% y/y to $23.53 bln (range $23.29 bln to $24.12 bln).
  • Price/Earnings of 28.6 compared to a 5-year average of 20.5; P/Book 8.3 compared to a 5-year average of 4.3, P/Sales 6.8 compared to a 5-year average of 4.1, and P/Cash Flow 15.4 compared to a 5-year average of 12.7. Dividend yield of 2.0% compared to a 5-year average of 2.6%.
  • Analysts view Microsoft with 26 Buy, 8 Hold, and 2 Sell ratings. (source: MarketBeat.com)
  • Insider sold 7,017,132 shares during the last three months and 53,755,086 shares in the past year. (source: NASDAQ.com) The company approved another $40 bln stock buyback program that began in 2017. Microsoft again raised its dividend 8% to 42 cents.
  • Microsoft is compared to other software and service companies with quarterly results possibly impacting Apple (AAPL), Google (GOOGL) and Oracle (ORCL).
  • Microsoft shares have shown a 1-day average price change on earnings of 4.47%. Options are pricing in an implied move of 3.49% off earnings.

Recent News

  • 10/13: Microsoft and Amazon announced a surprise partnership in which they are jointly releasing a free software tool for developers called Gluon, which makes it easier for developers to build AI/machine learning systems to compete with Google, according to a post on BusinessInsider.com.
  • 10/13: Joe Belfiore, Microsoft’s corporate VP of the Operating Systems Group, confirmed Microsoft won’t be adding new features or building new devices that run the mobile Windows Phone operating system, according to a post on BusinessInsider.com.
  • 10/05: Canaccord Genuity upgraded Microsoft to Buy from Hold on expectations revenue growth will accelerate over the next half decade. Growth drivers: (1) Office Productivity; (2) Gaming; (3) Marketing; and (4) Azure’s Platform as a Service, according to a post on Barron’s.com.
  • 10/04: Microsoft Corporation acquired social virtual reality application provider AltspaceVR and announced the availability of “Mixed Reality” headsets from partners – Samsung, Dell, HP, Acer and Lenovo, according to a post on Zack’s.com.
  • 09/27: Credit Suisse is making the case as to why Microsoft Corp. is becoming a cash flow story that should enable its stock to outperform citing prospects in the cloud computing market, according to a post on investopedia.com.
  • 09/20: Microsoft hiked its dividend by nearly 8% to 42c, up from 39c. Several analysts had hoped for a 10% increase, according to a post on Barron’s.com.
  • 08/22: Credit Suisse reiterated an Outperform rating on Microsoft shares following a deal between Halliburton and Microsoft in which Microsoft’s “Azure” cloud computing service will host the latter’s “iEnergy” service for exploration and production, according to a post on Barron’s.com.

Summary

Microsoft stock has led the overall market higher since mid-2016. Increased revenue expectations seem to be driving the stock higher despite valuations appearing stretched. Analyst bullishness remains and insider selling is normal for the company. Over the past year, Microsoft has beaten analyst consensus by an average of 11c the past four quarters but it was 6c before last quarter. Estimize consensus for an EPS (or adjusted EPS) of $0.78 on revenue of $23.882 bln compares to analyst consensus of $0.72 on revenue of $23.53 bln.

 

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