North America

Earnings Preview: Microsoft Q2 2017 (MSFT)

By: Craig Bowles

Overview

Microsoft, Corp. (MSFT) is slated to report 2Q2017 earnings after the close on Thursday, January 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.

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Outliers & Strategy

Key measures:

  • Earnings Per Share (EPS): (The last six quarters had Adjusted Earnings Per Share (EPS) & Non-GAAP Earnings Per Share (EPS) that was comparable to consensus.) The Street estimate is $0.78 (range $0.70 to $0.86). (Source: Yahoo! Finance) Consensus was $0.79 three months ago.
  • Revenues: Analysts expect a decrease of 1.6% y/y to $25.28 bln (range $24.91 bln to $25.86 bln).
  • Price/Earnings of 30.0 compared to a 5-year average of 20.5; P/Book 6.9 compared to a 5-year average of 4.3, P/Sales 5.8 compared to a 5-year average of 4.1, and P/Cash Flow 13.9 compared to a 5-year average of 12.7. Dividend yield of 2.3% compared to a 5-year average of 2.6%.
  • Analysts view Microsoft with 24 (19 last qtr) Buy, 7 Hold, and 3 Sell ratings. (source: MarketBeat.com)
  • Insider sold 8,004,953 shares during the last three months and 50,148,330 shares in the past year. (source: NASDAQ.com) The company approved another $40 bln stock buyback program with the current one to be completed by the end of 2016. Microsoft also raised its dividend 8% to 39 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 7.00%. Options are pricing in an implied move of 4.30% off earnings.

Recent News

  • 01/17: CLSA reiterated an Outperform rating on Microsoft citing both cloud computing and corporate demand for Windows 10 as things that could pay off for the company, according to a post on Barron’s.com.
  • 01/14: Microsoft affirms commitment to AI with Maluuba acquisition, according to a post on thenextweb.com.
  • 01/09: Morningstar downgraded Microsoft’s credit to double-A-plus from triple-A citing a weakening trend in credit pillars, particularly Cash Flow Cushion, the result of a more aggressive shareholder-payout policy and funding for the $26 billion acquisition of LinkedIn, which have contributed to higher leverage, according to a post on Barron’s.com.
  • 01/05: Pacific Crest Securities lists Microsoft among companies for 2017 with several high-quality cloud franchises that have compelling growth prospects yet are valued at favorable entry points, according to a post on Barron’s.com.
  • 12/22: Piper Jaffray initiated coverage of Microsoft with an Overweight rating citing that the company is “in the driver’s seat” in what he deems “a generational shift to cloud computing,” according to a post on Barron’s.com.
  • 12/12: Research firm Gartner notes there is some slowness in moving applications to the “public cloud,” which includes Amazon’s AWS and Microsoft’s “Azure,” according to a post on Barron’s.com.
  • 11/17: Goldman Sachs upgraded Microsoft to a Buy from Neutral as part of a mammoth 72-page report on the future of “public” cloud computing, according to a post on Barron’s.com.

Technical Review

Microsoft is one of several large companies that moved higher in recent years after having been basically flat for a decade.  GE’s stock has acted similar to Microsoft but tended to lead, so GE’s stock not confirming MSFT’s move up since mid-2016 is somewhat troubling. Microsoft has now pushed above levels where the dot.com boom found resistance. Point and figure technicians have increased their bullish price objective from $78 to $84. (Chart courtesy of StockCharts.com)

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Summary

Microsoft’s naming a new CEO in early 2014 and the ever-large stock buyback program appear to have helped the stock sustain a higher bias. Analyst bullishness has only increased and insider selling is normal for the company. Over the past year, Microsoft has beaten and missed analyst consensus by an average of 7c. Estimize consensus for an EPS (or adjusted EPS) of $0.81 on revenue of $25.357 bln compares to analyst consensus of $0.78 on revenue of $25.28 bln.

 

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