North America

Earnings Preview: Microsoft Q3 2017 (MSFT)

By: Craig Bowles

Overview

Microsoft, Corp. (MSFT) is slated to report 3Q2017 earnings after the close on Thursday, April 27th. 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 $0.70 (range $0.65 to $0.75). (Source: Yahoo! Finance) Consensus was $0.72 three months ago.
  • Revenues: Analysts expect an increase of 7% y/y to $23.62 bln (range $23.39 bln to $24.15 bln).
  • Price/Earnings of 31.2 compared to a 5-year average of 20.5; P/Book 7.5 compared to a 5-year average of 4.3, P/Sales 6.1 compared to a 5-year average of 4.1, and P/Cash Flow 14.3 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 23 Buy, 8 Hold, and 2 Sell ratings. (source: MarketBeat.com)
  • Insider sold 23,676,837 shares during the last three months and 65,792,418 shares in the past year. (source: NASDAQ.com) The company approved another $40 bln stock buyback program that began in 2017. 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 6.13%. Options are pricing in an implied move of 4.26% off earnings.

Recent News

  • 04/21: Canaccord Genuity believes the broad software sector could mark time by going sideways until investors can legitimately integrate 2018 estimates into valuations, according to a post on Barron’s.com.
  • 04/07: Microsoft’s “Surface” line of tablet computers has gotten the highest satisfaction rating among consumers out of all tablets, for the first time since J.D. Power has been doing the survey, according to a post on Barron’s.com.
  • 03/16: Cowen reiterated an Outperform rating on Microsoft citing a belief that Platform-as-a-Service (PaaS) will become a more important driver for cloud companies and demand for Azure will build, according to a post on StreetInsider.com.
  • 03/15: Raymond James has mostly positive comments on Microsoft’s entry into the so-called collaboration software market with “Microsoft Teams,” where Atlassian (TEAM) and Slack are well-known, according to a post on Barron’s.com.
  • 03/02: Al Gore’s $10.5 billion London-based Generation Investment Management shows a Buffett-like outperformance and their largest holding is Microsoft, according to a post on Barron’s.com.
  • 01/30: Microsoft sold $17 billion in bonds with seven tranches including 30 and 40-year issues. Analysts mentioned 3-year, 7-year, 10-year and 20-year as attractive, 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 something different. Microsoft’s move through $60 pushed above levels where the dot.com boom found resistance. Point and figure charts show a small balance are around $58 and a larger one at $51. (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 remains and insider selling is normal for the company. Over the past year, Microsoft has beaten and missed analyst consensus by an average of 6c the past four quarters. Estimize consensus for an EPS (or adjusted EPS) of $0.72 on revenue of $23.565 bln compares to analyst consensus of $0.70 on revenue of $23.62 bln.

 

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